Performance based pay isn’t unfamiliar to us. Ever since we were young we’ve competed with others. There was always a winner in spelling bees, sports, and various other aspects of our lives.
This philosophy has followed us into adulthood as we strive to achieve goals in school and our careers. Hard work deserves recognition and reward, which is what performance-based compensation provides.
Performance related pay may seem pretty straightforward, however, like most things, this compensation strategy comes with its fair share of pros and cons.
Therefore, before diving in, it’s important that you understand the advantages and disadvantages of this type of pay.
Performance-based Compensation Plans
Performance based compensation is a type of compensation that is directly linked to an individual’s or team’s performance. This type of compensation can be in the form of bonuses, commissions, or other financial incentives.
Performance-based pay motivates employees to achieve high levels of performance by tying their own personal success to the company’s success. By aligning employee goals with company goals, this compensation program can help improve overall productivity and profitability.
According to a survey conducted by Payscale, sixty-five percent of employees in the United States said they would rather receive bonuses that reflect their individual contribution to their company.
While performance-based compensation can have many benefits, it is important to carefully consider how it will be structured in order to avoid any negative consequences such as decreased morale or unhealthy competition among employees.
When done correctly, performance-based compensation can be a powerful tool for motivating employees and improving company results.
At Wizard of Sales®, we have helped a variety of companies design and implement effective sales compensation plans.
If you are interested in learning more about how you can scale your business faster, book a call with us today!
Have You Ever Thought of Linking Compensation and Performance?
Performance-based compensation can be a great way to motivate your employees and ensure that they are being paid for their hard work.
By linking compensation directly to performance, your employees can see the direct value of their efforts and be motivated to continue working hard.
There are a few different ways that companies can link compensation to performance. One common method is to base salaries or bonuses on an employee’s job performance.
Another way is to offer rewards for meeting or exceeding certain goals. This could include sales targets, productivity levels, or safety records.
No matter what compensation model you use, it is important to make sure that the criteria for awarding compensation are clear and objective. This will help to ensure that your employees feel that they are being treated fairly and that their efforts are being recognized.
Performance-Based Compensation: Pros and Cons
There are several factors to consider when deciding whether or not to implement performance based compensation in your organization.
Below, we outline some of the key pros and cons of this type of pay structure.
Managers can set goals using a well-defined framework
Implementing a compensation package can create a framework in which all your employees are evaluated. This framework can be used to set goals that are specific, measurable, attainable, relevant, and time-bound (SMART).
Employees are more likely to concentrate on what they need to improve if it is directly related to pay
When your employees know that their performance will have a direct impact on their compensation, it will motivate them to perform at their highest level. This will allow them to adopt well-defined actions and put more focus on the work that gets results rather than the result itself.
The best performers will be rewarded by a good PRP system
A PRP system is a tool used in business to help manage and coordinate employee performance reviews. The system can be used to track employee progress, identify goals and objectives, and document feedback.
A good PRP system can attract top talent, help identify top performers, and encourage them to keep up the good work by offering bonuses or other incentives.
It’s a good way to handle poor performing employees
By linking pay to performance, it is easier to manage and address poor performers. This can help to improve the overall performance of your company. For example, if an employee is not meeting their targets, you can easily see the data and address the issue.
Staff retention can be aided by rewarding high performance
When high performers are rewarded for their efforts, they are more likely to stay and be loyal to your company. This can also help to attract new employees as they will see that your company values and rewards high performers.
It provides employees with a direct incentive to meet predefined work goals
By tying compensation to specific goals, your employees have a direct incentive to focus their efforts on achieving those goals. This can lead to increased productivity and better results.
A tangible reward is given for an employee’s contribution
Tangible rewards, such as bonuses or commissions, can be motivating for your employees and help to increase their job satisfaction. This method of positive reinforcement will influence them to strive for their goals with more enthusiasm.
Its implementation can help to foster a healthy performance-based culture
Employees love to work in an environment they enjoy, around people that they get along with. Providing a healthy work culture can lead to higher levels of employee engagement and motivation, as well as better overall performance from your organization.
Employees may become demotivated if the goals set are too difficult to achieve
If your employees are constantly falling short of their targets, they may become demotivated and lose confidence in their abilities. This can lead to a decrease in productivity and an increase in absenteeism.
To avoid this, make sure that the goals you set are achievable and realistic.
Too much of the process is dependent on a manager’s ability to make sound decisions
Your system of compensation can backfire if the manager isn’t a good decision-maker.
For example, if a manager decides to give two employees different bonuses for the same job well done, this can create jealousy and resentment. The process should be clear and concise to avoid any confusion.
It reduces pay equity and can expose a company to costly equal pay challenges if not carried out fairly
If men and women on your team are doing the same job but are being paid differently based on their performance, this can create issues of pay equity. The same result can occur with employees of different races or ethnicities.
To avoid any legal challenges, make sure you’re compensating employees fairly for their job duties.
The performance appraisal process may suffer as a result of the emphasis on financial reward rather than developmental needs
When there is too much emphasis on rewarding top performers, it can take away from the development needs of your employees who are not meeting expectations. Be sure to address this issue in your company’s performance appraisal process.
Teamwork and cooperation can be hindered
Compensation based pay can easily stir up some unfriendly competition if done incorrectly. This can create a sense of entitlement or resentment and take away from the valuable teamwork and cooperation your workplace needs to thrive.
To avoid this, make sure you have a plan in place to reward teamwork and not just individual achievement.
It can give your employees “tunnel vision”
Because the reward is designed to achieve a short-term quantifiable goal, it may be too narrowly focused, which may not be in line with your company’s long-term objectives. Try to keep the big picture in mind when creating any type of compensation plan.
A risk that employees will expect an increase in pay year after year
This could create an expectation among your employees that they should receive a raise each year, regardless of company performance.
You always should be giving a reoccurring raise to your employees as a way to show appreciation for their continued work, however, you also need to be mindful of your company’s budget and make sure that raises are given sustainably.
A Motivator for Success
Performance-based compensation provides employees with a tangible way to see the results of their efforts and is one of the most effective motivators for success.
When you tie compensation directly to performance, employees are more likely to work hard and try their best to achieve desired results.
If you want your business to accelerate its growth in today’s competitive market, you need to do things differently. The things that worked when you were small cannot get you where you want to go next — this means changing HOW you do business and teaching your people how to do it the right way.
At Wizard of Sales®, we understand these principles and can help codify your vision, purpose, and processes so that everyone in your company knows what they need to do to drive revolutionary results.
Book a call with us today to learn more!