Pay-for-Performance Compensation has its Ups and Downs

One could say that compensation is the original motivator. And precisely how employers go about compensating employees remains a major factor in encouraging staff members to do their best work. One compensation model that has beckoned many organizations is pay for performance.

The concept

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

  1. A base component set by what the competitive market pays for a comparable position, factoring in skills and experience, and
  2. A variable component determined by how well an individual does (or group of employees do) 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, among employees receiving comparable base pay, the ones who contribute the most get paid the most when the variable component is added.

Benefits and risks

Ideally, pay-for-performance creates clear employee accountability for what you’re trying to accomplish. With this kind of clarity in place, employees should be better able to focus on the tasks that will generate desired results.

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.

Not surprisingly, top performers tend to respond well to these programs. They’re motivated by the strong link between their work and the achievement of company goals. For employees who struggle with motivation, a pay-for-performance program sends an unambiguous message to them — and their pocketbooks — about how their performance measures up.

The concept does have its risks. Some observers believe that employers shouldn’t use compensation to motivate employees because workers might stop focusing on quality and concentrate solely on money.

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

No quick fix

If boosting motivation is an organizational goal, a pay-for-performance program may be the means to accomplishing it. But don’t look at this approach as a quick and easy fix for an ailing compensation program or waning company morale. Let us help you assess the potential ups and downs for your specific situation.

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DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

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