What is Performance-Based Pay?
A performance-based pay structure refers to one that that is directly tied to an employee’s contributions to the business. Commonly this would be implemented via a commission or KPI driven compensation program, however it can also refer to increases to salary made as a direct result of the employee’s performance, or a merit-based pay increase.
Is Money Always the Best Motivator?
Employers are wise to consider how to effectively motivate their staff to achieve outstanding results, but is money always the best motivator? In a post-pandemic world, where nearly 50 percent of Australian’s are working from home regularly and reluctant to return to traditional office environments, does an increase in pay or KPIs that result in bonuses work to motivate?
Although a performance-based pay model can seem like a no brainer in certain types of roles, performance-based pay can also be difficult for employers to track. This is particularly true in roles outside of the sales team.
Even when you can quantify the results of your team you are at risk of valuing quantity over quality, rewarding the volume of work completed but creating an environment where high-quality work is sacrificed in favour of rushed output.
You may find that some employees flourish under a performance-based pay model, while others experience higher levels of stress and lower levels of job satisfaction. It can negatively affect the culture of a team, especially when individual results are rewarded more than teams. Once this impact is noticed it is often hard to revert to the previous pay structure, go-getting team members who thrive on the challenge may be tempted to leave the organisation if they are no longer rewarded monetarily for their individual results.
They might leave anyway, according to salary.com, the external market is progressing in pay so fast your top performers could potentially look elsewhere for a more competitive salary.
Still, pay increases and bonuses for bulk work, even in operational environments, can be beneficial. Performance-based pay models can also improve the recruitment and retention of high-performing talent. For top performers, understanding what’s expected of them and being rewarded when they achieve results encourages them to stay.
KPI’s and Goals
Having in place KPIs and goals to track performance and reward it can also reveal areas for improvement. Assigning quantifiable values to team members’ contributions can then assist in identifying the low performers and employers can investigate why they’re performing below expectations. This can lead to tailored training processes, re-evaluation of goals and targets and strengthen communication.
By nature of a performance-based pay structure, employees who contribute more to their teams and the company will in theory be paid more, thus encouraging higher productivity.
The control of compensation is also largely in the employee’s hands, higher work output often results in higher payment. This not only allows the employee more influence over their pay, but also puts in place clear expectations for remuneration, reducing miscommunication regarding pay rises and other benefits, as well as fostering transparency around the subject of pay.
So, is a performance-based pay model effective and should you consider it for your team? Well, while it can be an effective way to motivate your employees and reward them for being more productive, it’s crucial to find the right balance between job role expectations and compensation.
The goal is to engage your employees without creating a mindset to overwork themselves to meet arbitrary goals and earn additional compensation, rather than working to meet the overall goals of the company.
If you’ve weighed the pros and cons of performance-based compensation and feel it’s the next step for your company, ensure there are robust performance measurements in place to track the goals you’ve set for your workers and that they align to the broader goals of the organisation to ensure an effective performance-based compensation structure.
About Employment Innovations
Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.