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:
- Differentiate bonuses from incentive pay. Bonuses are paid based on past outcomes. Incentives are intended to motivate future outcomes.
- 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.
- 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.
- 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.
- Aim for self-funding, i.e., plan for incentives to come out of increases in sales or productivity.
- 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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