Trends In Compensation
Pay-for-performance Model Beckons Many Companies

Target Audience: Business Owners, Financial Managers, Accounting Consulting Firm Advisement Interest, Trends in Compensation, Payment Models Interest, Motivators, Human Resources

From the moment you hired your first employee, or took over the company you currently own, you likely started wondering how you’d keep your workers motivated. Of course, ideally, every employee would be self-motivated but, at some point, even the best staff member typically needs a target to shoot for beyond “a job well done.”

Compensation is, one might say, the original motivator. Yet precisely how to compensate employees is no longer the simple concept it once was. One compensation model that has been beckoning many companies of late is pay-for-performance.

The Concept

Under the pay-for-performance model, an employee’s total compensation is the sum of two distinct parts:

A base component set by what the competitive market pays for a comparable position, factoring in skills and experience, and

A variable component determined by how well an individual or group of employees does in meeting specific goals.

The variable pay an employee receives is based on her or his performance or contribution as determined by measuring the worker’s results against individual targets that are set and clearly communicated in the beginning of each performance period. Hence, those who contribute the most get paid the most.

For instance, if a companywide goal is to retain key clients by providing quality service, the variable pay part of an employee’s total compensation could be linked to measurable indicators of delivering quality client service. The logic is that, if you set specific goals, employees can earn more by reaching or surpassing those goals. And this in turn will lead to heightened client service quality.

The Upside

Essentially, an effective pay-for-performance program will help drive employees’ performances toward accomplishing your company’s strategic goals.

More specifically, it creates clear employee accountability for what you’re trying to accomplish. With this kind of clarity about how you define success, employees should be better able to focus on the tasks that will generate desired results.

Not surprisingly, top performers tend to respond well to these programs. They’re motivated by the clear link between their work and the achievement of company goals. And they enjoy seeing their hard work rewarded — not to mention receiving a larger paycheck.

For employees who struggle with motivation, a pay-for-performance program sends a clear message to them — and their pocketbooks — about just how their performance measures up. Yet don’t give up too quickly on these employees. Work with your managers to guide these workers to better results by making sure they understand their goals and pointing out ways to better meet them.

The Risks

Naturally, pay-for-performance has its risks. Some observers believe that companies shouldn’t use compensation to motivate employees because workers might stop focusing on work quality and start focusing solely on money.

Additionally, workers may feel that the pay-for-performance model pits staff members against each other for the highest raises. This may serve to foster unrest and poor morale instead of the productivity increases you want.

To combat these problems, your company should make the variable components that trigger pay increases as specific as possible. In addition, you might provide some of the performance pay on a team basis, rather than just on an individual basis. By providing additional pay to a team, you may help reduce or eliminate rivalry among staff members.

Not a Quick Fix

As you can likely see, pay-for-performance shouldn’t be considered a quick fix for an ailing compensation program or waning company morale. It calls for taking a detail-oriented approach to how you compensate your company’s various positions. Nonetheless, if motivation is your goal, a pay-for-performance program may be the means that could help you accomplish it.

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