Why wouldn’t every company implement an effective Pay For Performance plan?
This is a concept that is an integral part of the American dream; the harder you work, the more money you make. For many of us, how well we are compensated for the job we do plays a major role in how we define ourselves. It also determines our motivation to improve our performance – or not. By definition, incentive compensation payouts are based on achievement of a predetermined set of objectives, milestones, or targets in order to motivate employees and align their actions with a company’s goals. If the results are achieved, then there’s a payout. Pay-for-performance plans are common in sales force compensation packages as well as in bonus programs for top executives. So if incentive plans are successful in these areas, when should they be applied to a broader range of employees? In my work with clients, and in my ongoing compensation research, I am actually seeing the trend of expanded pay-for-performance plans due to the many benefits a well-designed plan can deliver.
Pros of Adopting a “Pay For Performance” Mindset
Align employee’s actions with the interests of the company. What aspect of the business do you need to improve? Customer service? Productivity? Business processes? A pay-for performance plan is an excellent way to focus your employee’s actions on the areas that need attention. They are a tool that can be used to shine a spotlight on key company priorities and business drivers.
Attract and Retain Talent. A critical business objective for every company, well-designed pay-for-performance plans help companies compete for the talent they need and communicate company priorities and critical business objectives to employees.
Give employees a stake in the company’s success. Obviously employees realize that performing their job well helps the company do well, but the company’s success can be too far removed from the daily activity of the employee to be a motivating factor. A pay-for- performance plan can bring the interests of the employee closer to the interest of the company.
Cost control. Although not as important as the factors mentioned above, one cannot ignore that pay-for-performance plan mitigate financial risk for the company. Since these plans are tied to performance, they are effective cost control mechanisms. In addition, pay-for-performance payouts are not added to base pay, and thus don’t generate the compound growth of fixed-costs that base pay increases do.
Given all of those potential benefits, why wouldn’t every company implement an effective pay-for-performance plan? As with any powerful tool, pay-for-performance plans have a learning curve and require regular maintenance. If misapplied, they can do more harm than good. Employers need to be sure the plan does not end up demoralizing the employees. So, whether you are implementing a pay-for-performance plan for the first time, or trying to improve the effectiveness of an existing plan, make sure to be mindful of the above caveats when executing your pay-for-performance plan.