Obviously, one of the main motivations for companies to offer pay for performance is to encourage exceptional performance among employees. Since employees are directly related to a company’s success, it’s no surprise that pay for performance came about - the better your employees do, the better the company does. However, there are perhaps other motivations for employers to embrace this model. For one, it allows companies to incorporate several factors into pay. This provides the opportunity to pay for more than just the number of years someone has been with the company or how much experience they have. Employers can add components that relate to market conditions, performance metrics and more. In short, your paycheck reflects the quality and/or quantity of work employees do rather than their tenure.
Success and failure
Many organizations have given pay for performance a try over the last 25 years or so, but the outcome has been vastly different between entities. We’ve seen pay for performance work well many times but nearly half of all companies are still using a tenure-based system.
While there is no denying that as a whole, workers are accustomed to seeing at least a portion of their pay linked to their individual performance, it doesn’t mean that they don’t have opinions about the topic. Some enjoy the opportunity to have control over their compensation but some see it as a source of stress. Additionally, many find it motivating, but employees should not forget that intrinsic motivators move many employees as well, such as the satisfaction of completing a project, making a sale or knowing they’ll receive praise for a job well done.
It seems that overall, linking at least a small percentage (10 to 20) of employees’ compensation to performance may be a good move, but there are many factors to consider, including whether or not employees are already motivated to be successful, if they are naturally willing to go above and beyond and whether it ultimately benefits the employees or the company. Aside from those foundational considerations, you’ll also want to make sure the right metrics are chosen, you are crystal clear about what success looks like and what happens when the metrics are met or not met.
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Learn more in this telling PayScale whitepaper: Strengthening the Link Between Pay and Performance