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6 Pointers for Linking Pay With Performance

This is an excerpt from our ebook collaboration with BambooHR, “Evaluating and Rewarding Employee Performance at the Speed of Business.” Download the full guide here.

You’d be hard-pressed to find a leader who doesn’t believe that pay and performance should be linked. In every corner of private industry— whether for-profit or not-for-profit—the days of across-the-board living increases are long gone. Instead, employers are motivating and recognizing employees by creatively layering base and variable pay with perks like flexible schedules, free coffee, professional subscriptions and gym memberships. Positive affirmations like a simple “thank you” are smart incentives as well.

Besides performance-based pay increases, bonuses and incentives are the most common way employers are linking pay and performance.

PayScale’s 2017 Compensation Best Practices Report found that 74 percent of all employers offer some type of variable pay. Of these employers, 64 percent give individual bonuses, and 25 percent give team bonuses.

PayScale’s 2017 Compensation Best Practices Report found that 74 percent of all employers offer some type of variable pay.Click To Tweet

Pay-for-performance is an equation in which some portion of an employee’s compensation is related to how they perform based on some stated criteria, whether those be individual goals, group goals, business goals, or some combination thereof. And within the equation, it’s crucial to get the balance right.

When the pay performance equation gets out of balance, it can lead to employee dissatisfaction: employees who are getting paid more than their performance merits may wonder how long it’ll take anyone to notice, and whether they should be planning an exit strategy; and employees who are getting paid too little relative to their performance will face pressure to find a job where they’re paid what they’re worth.

A few other pointers on linking pay to performance:

  1. Differentiate bonuses from incentive pay. Bonuses are paid based on past outcomes. Incentives are intended to motivate future outcomes.
  2. Match the incentive cycle to the work cycle. Consider linking incentives to the speed of work. For example, if your employee has just finished a six-week project, pay the incentive at the end of that six weeks.
  3. Align your incentives at the individual, team and organizational level. Every objective is either met or missed because of actions taken at the individual, team and organizational level. Make sure your incentives reflect this reality.
  4. Think about the mix of base pay to variable pay, depending on your organization’s size, the types of jobs, your industry and so on.
  5. Aim for self-funding, i.e., plan for incentives to come out of increases in sales or productivity.
  6. Keep it simple. If your comp plan is too complicated, your employees won’t understand it and won’t be motivated by it. Plan administrators will struggle with it, too.

Want more tips on how you can make the link between pay and performance stronger? Download our ebook (in collaboration with BambooHR), “Evaluating and Rewarding Employee Performance at the Speed of Business.

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JenJulie KellmanLiz D'AloiaBob ShadeJenny Schmidt Recent comment authors
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Edwin
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Edwin

We use pay for performance to reward our non-bargaining employees and reward our top performers with meaningful compensation

Criston Menz
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Criston Menz

So true to make the variable pay easy to understand, achievable and timely.

Chris Thorpe
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Chris Thorpe

We follow a very traditional approach with a traditional, once-a-year performance evaluation. Would love to see a more dynamic, continual evaluation process that matches up better with the changes in business focus throughout the year.

Cindy Larson
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Cindy Larson

Our organization has tied compensation to outcomes performance, but we make permanent salary increases as opposed to planned bonuses/incentives. We don’t wait until an annual performance review, however, to make those assessments and increases. We will pay spot bonuses for outcomes or effort above and beyond.

Christina
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Christina

We currently have a blend of pay for performance and traditional cost of living increases but are moving more towards pay for performance only in the future.

Carla Williams
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Carla Williams

I think there’s something to be said about how to match the incentive cycle to the work cycle…. Paying employees 1x year for variable pay is not reinforcing short term efforts. I don’t know the solve and it’s complicated by business due to complexity, fairness, company size, cash flow, etc….. but I think we have to trend that direction to encourage employees to stay on board.

Jenny Schmidt
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Jenny Schmidt

I couldn’t agree more with the sixth point, Keep it Simple. Often times we are on a quest to enhance, streamline, and expand current processes. This can sometimes leave others, including Managers and admins, feeling that these changes have left more confusion. Keep it simple and make sure you communicate the changes clearly can go a long way.

Bob Shade
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Bob Shade

We currently have multiple ways to recognize employee contributions. We have the annual award cycle where employees may receive a base pay increase, a lump sum award or a combination of both. Pay decisions are based on an assessment of the employee’s achievements, risk/impact of loss to the organization, demonstrations to our core competencies and job’s market value. In addition we have a spot award program through with managers may reward the completion a major project, milestone, service excellence, etc. with a cash award. We are slowly expanding the use of annual bonus/incentive programs within the organization and are starting… Read more »

Liz D'Aloia
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Liz D'Aloia

Saying thank you is free, and so underused.

It’s always important to have a right mix of base pay and incentive pay. Just make sure you’re driving the desired behaviors and outcomes through incentives. For example, if you reward managers based on turnover rates, they may be reluctant to performance manage poor performers. Remember Wells Fargo….

Julie Kellman
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Julie Kellman

I love that you distinguished between incentive pay and bonus. I’ve been trying to make this point for years!

Jen
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Jen

We use a merit-based pay for our “annual” increases and we also use a bonus, 3-months later, for incentive pay.

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