Payroll is the single biggest cost to most businesses, second only to salaries and benefits. Yet payroll is so heavily reliant on compliance, data processing and human resource staff that most firms have decided to seek alternative ways to increase employee availability and efficiency. One such approach is the Pay for Performance compensation model. Pay-for-performance, or performance pay as it is commonly known, is a model that involves paying employees based on one or more performance metrics. There are two main types of pay for performance: incentive and non-incentive. An employee’s pay is increased when the performance metric is met after setting a target. This gives employers the opportunity to motivate high performing employees by rewarding them for exceeding their weekly, monthly, or yearly goals.
According to a 2021 Compensation Best Practices survey by PayScale, 65.3% of organizations feel that after the events of 2020, it is important to change their compensation strategy in the next 12-18 months. However, every business should identify outcomes it wants its people to accomplish and how it will impact the company’s financial future.
A study by Salary.com reveals 77% of companies in the U.S. are using variable pay programs as part of their total rewards packages, with an additional 9% stating they will or could adopt a variable pay plan within the next two years.
Pay-for-performance strategy can be effective, but it faces challenges. A Salary Increase Projections 2021 study by SHRM shows that organizations that offer performance-based variable pay dropped from 73% to just under 70% between 2019 and 2020. When companies evaluate whether pay-for-performance is the right approach to getting rewarded for results, they are forced to confront questions like: “What constitutes a high value contribution that produces real value?” and “What should we do to get those results, even if some of them don’t feel worth paying for in terms of direct dollar value?”
Performance-Based Pay models are still in their infancy compared to the conventional ones. The ability to learn, develop and improve is one thing that these models excel in. It is a method of evaluation that makes you think about the job that you are already doing. If businesses keep in mind the below pointers, a pay for performance model can be a game changer:
According to World at Work, 99% of private-sector employers use short-term variable pay awards, such as project bonuses and spot awards, and annual pay incentives. Organizations need a pay-for-performance system that is customized to their individual workforce and incentive program needs. HR leaders need the right training and tools to be able to manage and measure employee engagement, productivity, and profitability metrics with the goals of productivity gains.
Organizations are beginning to understand the central role performance plays in effectively measuring, managing, and promoting employee engagement. Organizations that are looking to improve either recruitment or retention through paying people to perform need to recognize and utilize pay for performance programs depending on an individual’s job requirements by applying the right combination of base salary, incentives, and other forms of compensation.