pay for performance business plan

• Compensation Management , Performance Management

Crafting a Solid Pay for Performance Plan for Employees

• January 22, 2024

Organizations are constantly seeking innovative strategies to enhance employee motivation, engagement, and overall employee performance. One such approach gaining widespread recognition is the implementation of a robust Pay for Performance plan. 

This blog post is your roadmap to crafting a pay for performance plan that inspires, rewards, and delivers results. Hop on!

What is Pay for Performance?

Pay for performance is a compensation strategy that ties an individual’s pay or financial rewards directly to their performance and contributions in the workplace. The fundamental principle behind pay for performance is to create a direct link between an employee’s efforts and achievements, and the compensation they receive.

Types of Pay for Performance

Individual Performance-Based Bonuses : Employees receive bonuses and pay increases  based on their individual performance against predetermined goals and KPIs.

Sales Commissions : Sales professionals earn a percentage of the revenue generated from their sales, directly tying their compensation to their sales performance.

Profit-Sharing Plans : Employees receive a share of the company’s profits based on their contribution to the organization’s financial success.

Stock Options : Employees are granted the option to purchase company stock at a predetermined price, providing them with a stake in the company’s performance.

Benefits Of Implementing Pay For Performance In An Organization

Implementing a pay for performance system in an organization can bring about a range of benefits that contribute to the overall success and growth of the company. Here are some key advantages of adopting a pay for performance approach:

Enhanced Employee Motivation:

Pay for performance directly ties financial rewards to individual and team achievements. This creates a powerful incentive for employees to excel in their roles, fostering a motivated and engaged workforce.

Increased Productivity:

The correlation between the employee’s performance and their compensation plan encourages them to strive for higher levels of productivity. Knowing that their efforts directly impact their earnings motivates individuals to work more efficiently and contribute to organizational goals.

Attracting and Retaining Top Talent:

A well-structured pay for performance system can attract high-caliber, quality talent by offering competitive compensation aligned with performance . Additionally, it helps retain top performers who seek recognition and reward for their exceptional contributions.

Alignment with Organizational Goals:

Pay for performance ensures that individual and team efforts are closely aligned with the strategic objectives of the organization. Employees become more attuned to the company’s mission, resulting in a more cohesive and goal-oriented workforce.

Challenges of Implementing a Pay for Performance System

Subjectivity and bias:.

Pay for performance systems can be susceptible to subjective evaluations and unconscious biases, potentially leading to favoritism, discrimination, or inequitable distribution of rewards based on individual relationships rather than objective performance metrics.

However, performance management systems like Peoplebox ensure that performance evaluations are data-backed and unbiased.

Short-Term Focus:

Employees may prioritize short-term goals to maximize immediate rewards, potentially neglecting long-term strategic initiatives that contribute to sustained organizational success. This short-term focus can impact innovation and overall company growth.

With Peoplebox, you wouldn’t have to worry about this as you get a holistic view of the overarching business goals, and each individual goal is tied to these organizational goals.

Employee Burnout:

The pressure to consistently perform at a high level to receive financial rewards can lead to employee burnout. Extended work hours and heightened stress levels may negatively impact well-being, job satisfaction, and overall morale within the workforce.

Collaboration Challenges:

Pay for performance systems often emphasize individual achievements, potentially hindering collaboration and teamwork. Employees may hesitate to share knowledge or resources, creating silos that can impede overall organizational effectiveness.

Unintended Consequences and Unhealthy Competition:

The competitive nature of pay for performance can create an unhealthy work environment, fostering cutthroat competition among employees. This may lead to a lack of cooperation, reduced knowledge sharing, and a focus on personal gain rather than collective success.

Clearly, there are both positive and negatives to implementing the system in your organization. We recommend conducting a thorough analysis of your organizational culture, industry dynamics, and workforce characteristics before making a decision.

The Relationship between Performance Management and compensation

Performance management serves as the foundation for transparent and fair compensation practices, as it provides the framework for setting performance expectations, assessing progress, and providing feedback. 

The intrinsic link between performance management and compensation lies in their symbiotic nature. Through performance management processes , organizations can identify high-performing individuals, acknowledge their contributions, and align pay structures accordingly. Clear performance expectations , regular evaluations, and constructive feedback create a meritocratic environment where employees understand that their efforts directly impact their compensation. 

This relationship fosters motivation, encourages continuous improvement, and ensures that compensation practices are intricately tied to individual and team performance , promoting equity and fairness within the organization. 

Utilizing integrated OKR and performance management tools such as Peoplebox further enhances this relationship by streamlining performance management processes, facilitating real-time feedback, and ensuring a seamless alignment between performance and compensation strategies.

Designing a Pay for Performance Plan

Crafting a robust pay for performance plan is a strategic endeavor that requires careful consideration of organizational goals, individual performance metrics, and the overarching  workplace culture. Here are some steps you can take to ensure the successful design and implementation of an effective pay for performance plan:

Understanding Organizational Goals:

Strategic Alignment:

Begin by gaining a profound understanding of your organization’s overarching goals and objectives . Your pay for performance plan should be intricately aligned with these strategic imperatives to ensure that employee efforts contribute directly to the company’s success.

Set ambitious goals that drive performance with Peoplebox

Key Performance Indicators (KPIs):

Identify and define Key Performance Indicators (KPIs) that encapsulate the critical outcomes necessary for achieving organizational goals. These KPIs will serve as the foundation for measuring individual and team performance.

Here’s an example of how KPIs can be identified and defined for different organizational goals:

With Peoplebox, you can effortlessly craft personalized and professional KPI dashboards in minutes.

See Peoplebox in Action

Crafting Individual Performance Metrics:

Clear and Measurable Objectives:

Establish clear and measurable performance objectives for each role within the organization. These objectives should be directly connected to the identified KPIs and contribute to the broader organizational strategy.

OKRs or Objectives and Key Results come in handy for establishing a framework that aligns individual performance objectives with organizational goals. By emphasizing clarity, outcome-focused measurement, and continuous adaptation, OKRs foster a culture of accountability and collaboration. This integration ensures that employees not only comprehend their role in achieving organizational objectives but are also motivated to contribute meaningfully to the collective success of the organization.

If this is the first time you have heard of OKRs, our OKR cheat sheet can help you understand them in depth.

Quantifiable Targets:

Define quantifiable targets for each performance metric. Whether it’s sales targets, project milestones, or customer satisfaction scores, having clear and measurable targets provides focus.

Determining Compensation Structure:

Variable Pay Components:

Design a compensation structure that incorporates variable components directly tied to performance outcomes. Consider elements such as performance bonuses, profit-sharing, or commission structures that fluctuate based on individual and team achievements.

Fair and Transparent Criteria:

Clearly outline the criteria for earning variable compensation. Pay transparency is crucial to build trust among employees. Ensure that the criteria are fair, objective, and consistently applied across all roles.

Communication and Employee Engagement:

Transparent Communication:

Communicate the pay for performance plan transparently to all employees. Clearly articulate how individual performance links to organizational success and how the compensation structure has been designed to reward exceptional contributions.

Employee Involvement:

Involve employees in the goal-setting process. Encourage them to actively contribute to defining their performance objectives, fostering a sense of ownership and accountability in the pay for performance journey.

Did you know, Peoplebox lets you do a LOT right within your favourite collaboration tools?

Continuous Monitoring and Evaluation:

Regular Performance Reviews:

Implement regular performance reviews to assess progress toward the set goals and provide constructive feedback . This ongoing evaluation ensures that employees are aware of their quality of work, performance levels and areas for improvement.

Flexibility for Adjustments:

Design the pay for performance plan with flexibility for adjustments. Business landscapes evolve, and organizational goals may shift. The pay for performance plan should be adaptable to changing circumstances, allowing for modifications as needed.

Employee Development and Recognition:

Professional Development Opportunities:

Integrate opportunities for professional development within the pay for performance plan. Linking performance to learning and professional growth opportunities can further motivate employees to enhance their skills and contribute to organizational success.

Recognition Programs:

Establish recognition programs that celebrate individual and team achievements. Publicly acknowledging outstanding performance creates a positive culture and reinforces the connection between effort and recognition.

Regular Plan Evaluation and Iteration:

Performance Metrics Review:

Periodically review the effectiveness of the chosen performance metrics. If certain metrics are not aligning with organizational goals or proving challenging to measure accurately, be prepared to make adjustments.

Employee Feedback Integration:

Solicit feedback from employees about the pay for performance plan. Their insights can provide valuable perspectives on the plan’s impact, fairness, and areas for improvement. Use this feedback to iteratively enhance the pay for performance design.

Here’s a quick look at how easy it is to create surveys on Peoplebox.

Now that you know how to implement a robust pay for performance plan, let’s dive into some performance management and compensation management strategies you can use.

Performance Management and Compensation Management Strategies

Bridging the gap between performance and compensation can be tricky. Here are some tried and tested strategies you can use for a seamless pay system.

Performance Management and Compensation Strategies for Emphasizing Clear Communication:

Strategic Alignment Communication:Communicate the strategic alignment of individual and team performance with organizational goals. Ensure that employees understand how their contributions directly impact the overarching success of the company. For example, if you leverage a strategy execution platform like Peoplebox, you can easily get a holistic view of the entire organization, which enables seamless communication of the strategic alignment of individual and team performance with organizational goals.

Transparent Criteria Communication:

Clearly communicate the criteria used for performance evaluation and compensation determination. Complete transparency in these processes builds trust, mitigates uncertainties, and fosters a culture of openness. More often than not, there are a few key performance review competencies that come into play when evaluating performance. Determine what works for your organization, and openly communicate these key competencies to employees. 

Regular Communication Channels:

Establish regular communication channels to update employees on performance expectations, progress, and any changes in the compensation structure. Consistent communication reinforces a shared understanding of performance objectives.

Prioritizing Fairness in Strategies:

Equitable Evaluation Criteria:

Implement evaluation criteria that are fair, objective, and consistently applied across all roles. This ensures that every employee is assessed based on the same standards, promoting a sense of fairness in the organization. In our recent article, we share 5 ways to improve diversity and inclusion in the workplace . Check it out.

Balanced Reward Allocation:

Design reward allocation systems that strike a balance between individual and team goal achievements. Recognize and celebrate both individual excellence and collaborative efforts, fostering a culture that values collective success.

Merit-Based Compensation:

Prioritize a merit-based compensation system to ensure that rewards are directly linked to individual contributions and accomplishments. This approach reinforces a meritocratic culture where employees are motivated to excel for personal and organizational success.

Fostering Transparency in the Process:

Open Performance Discussions:

Encourage open discussions about performance expectations, their own goals, and outcomes. Creating a transparent environment allows employees to actively engage in their own development and understand the rationale behind compensation decisions.

Clear Evaluation Processes:

Outline and communicate the entire performance evaluation process clearly. From goal setting to assessment methodologies, transparency in the evaluation process ensures that employees have a comprehensive understanding of how their performance is measured.

Accessible Compensation Information:

Make compensation package information accessible and understandable for employees. Transparency in how compensation is calculated, including base pay and any variable components, contributes to a sense of fairness and reduces ambiguity.

Measuring the Impact of Pay for Performance

Measuring the impact of pay for performance plans is crucial for understanding their effectiveness in driving employee engagement, retention, and overall organizational performance. Let’s look at the intricate process of measuring the outcomes of pay for performance initiatives, with a specific focus on their effects on employee engagement, retention, and overall organizational performance.

Assessing Employee Engagement:

Employee Satisfaction Surveys:

Conduct regular surveys to gauge employee satisfaction with the pay for performance system. Inquire about perceived fairness, motivation levels, and the system’s influence on their commitment to organizational goals.

Participation in Performance Programs:

Measure the level of employee engagement by analyzing participation rates in performance improvement programs linked to the pay for performance structure. Higher participation may indicate a positive impact on engagement.

Feedback Mechanisms:

Establish transparent channels for employees to provide feedback on the pay for performance system. Regular feedback sessions can reveal insights into employee perceptions and areas for improvement.

Evaluating Employee Retention:

Retention Rates:

Compare pre-pay for performance and post-pay for performance implementation retention rates. A decrease in turnover may signify that the pay for performance system is contributing to employee satisfaction and loyalty.

Exit Interviews:

Conduct thorough exit interviews to understand both the internal and external factors behind employee departures. Analyze whether dissatisfaction with the pay for performance system is a contributing factor.

Promotion and Advancement:

Track employee promotions and advancements. An increase in internal promotions may indicate that the pay for performance system is recognizing and rewarding high performers in an effective way, contributing to retention.

Gauging Organizational Performance:

Productivity Metrics:

Analyze changes in productivity metrics following the implementation of the pay for performance system. Increased productivity may indicate that employees are motivated to perform at higher levels.

Financial Performance:

Assess the overall financial performance of the organization. A positive correlation between the pay for performance system and financial outcomes may signify the effectiveness of the incentive structure.

Employee Contributions to Organizational Goals:

Evaluate how well individual and team contributions align with organizational objectives. The pay for performance system’s impact on goal alignment can be indicative of its influence on overall organizational performance.

Leveraging Peoplebox for Performance-Driven Compensation

Peoplebox’s performance management features offer a robust platform for creating a seamless and effective pay for performance plan. The platform facilitates goal setting and alignment, enabling organizations to establish OKRs that directly link employee efforts to overarching business goals. 

With continuous performance evaluation and data-driven insights, Peoplebox empowers organizations to make informed compensation decisions based on actual performance outcomes, fostering a culture of meritocracy and fairness.

Start your journey towards a high-performing workforce by embracing Peoplebox today. Get in touch with us.

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The Pros and Cons of a Pay for Performance Model

A pay for performance compensation model is a popular method used by HR departments where you encourage your employees to hit their performance goals by offering them a monetary incentive. This might be in the form of merit pay increases or variable pay programs.

Pay for performance can be a great tool for increasing employee productivity, however, it might not always lead to positive workplace culture. A recent survey suggests that 77% of companies in the U.S. are now using them as part of their employee recognition schemes, but do these plans really work for everyone?

In today’s post, we are going to take a look at how they work to help you find the right model for your business. We’ll compare the pros and cons of using pay for performance, and we’ll discuss whether this compensation method can really help you motivate your employees.

Pay for Performance Definition: What is It?

How does pay for performance work, types of pay for performance models, pay for performance pros and cons, does pay for performance really motivate employees.

• ✅ Performance Management Software for Companies ✅

Pay for performance is a compensation model used as part of a wider continuous performance management initiative.

What does this mean?

The basic idea is that you pay employees based on how well they perform their duties. You do this by setting performance goals for each employee and paying them a bonus when they reach or exceed their objectives. This might be in the form of merit pay, or one of a variety of variable pay programs.

Some view the pay for performance model as a fairer approach to employee salaries. With a more traditional compensation method, all employees at the same level are paid the same amount, regardless of whether they under or over-perform. There’s no real incentive to try harder. In contrast, with a pay for performance program, you motivate your employees to perform to the best of their abilities and strive for continuous improvement by offering them tangible rewards. Many argue that it can encourage engagement and boost top talent retention.

We’ve looked at a basic performance-based compensation definition. Now let’s discuss how it works.

The pay for performance model and processes you implement will depend on a range of factors. To work out which model works best for you, you need to consider your organization’s budget, compensation philosophy, and organizational goals.

What are you hoping to achieve? How often will you reward employees? Do you have an established budget? Which performance-based pay plans would work best in your organization?

Ultimately, the way pay for performance works will depend on your employee performance management system, how you conduct your appraisals, and the employee performance metrics you use to track progress. Do you use a specific assessment model such as the 9 box grid? How do you calculate performance-based pay and conduct performance reviews for remote employees ?

The best way to make sure you collect all the important information during your employee performance reviews is to design a template. This can take time to develop and get right. The questions you ask need to be well thought out, well-executed, and tailored to your organization. This will help you ask the right questions, evaluate the full spectrum of performance, and align it with your pay for performance programs.

If you don’t already have one, you can download and adapt Factorial’s 360 performance appraisal template.

As we mentioned above, there are two primary types of pay for performance programs: merit and variable. You can choose one method or implement both to boost performance and motivate your employees.

The first pay for performance model is merit pay. This is where you increase the base salary of an employee as a result of high performance. If an employee hits their goals or exceeds expectations, you reward them by raising their salary at their next salary review meeting.

This is the most common pay for performance model. Raises are usually implemented on an annual basis and are included in a company’s budget. They are also permanent, so employers usually look for signs of consistent high-performance before rewarding an employee with a merit-based salary increase.

The benefit of merit pay is that it allows you to differentiate and account for individual performance within your teams. The downside is that as salaries are usually only reviewed once a year, a high-performing employee might be tempted by a higher salary elsewhere before you have the chance to reward them for performing consistently well.

Variable Pay

The other type of pay-for-performance model is variable pay. This model includes a range of bonus types that vary according to payout period, eligibility, and employee metrics. They are usually tied into your employee recognition programs and, unlike merit pay, they are not dependent on annual salary reviews.

Bonus types include:

• Discretionary bonuses : Awarded on an ad-hoc basis to employees demonstrating outstanding performance. You wouldn’t usually tie these to specific pre-defined goals. Examples include spot bonuses (where employees are rewarded “on the spot” for achievements that deserve special recognition), project bonuses (where employees are rewarded for successful completion of a project), and retention bonuses (usually awarded to long-tenured employees to encourage retention).
• Non-discretionary bonuses : Awarded when employees meet specific, pre-defined goals and objectives. Non-discretionary bonuses can take the form of short-term incentives (STI) or long-term incentives (LTI). Examples include company-wide bonuses (based on specific improvement goals for the company), team-incentive bonuses (based on team performance/achievements), and individual incentive bonuses (based on predetermined, measurable business objectives).

Performance-based programs can be a great tool for helping you meet your business goals. However, they might not work for everyone, and they are not without their disadvantages , especially if you don’t take the time to design a strategy based on clear guidelines and processes.

Let’s take a look at some of the specific pros and cons to help you decide if the program could be a good fit for your organization.

• Boosts motivation and morale
• Increases productivity
• Helps you nurture a high performance culture
• Clarifies the process of setting achievable goals
• Helps create a strong bond between employee and employer
• Plays a part in creating a healthy performance-based culture
• Establishes company values
• Offers employees more control
• Enables you to attract and retain top talent
• Finally, it can lower costs and help businesses to remain profitable

Disadvantages

• Firstly, it may have a negative effect on teamwork if employees feel they are competing with each other
• Secondly, it can distract from team objectives if employees are more focused on their own skills or productivity.
• If you don’t manage it well, it can result in too much focus on quantity of work, rather than quality. This, in turn, can lead to employee stress
• Moreover, you risk putting too much focus on objective skills that can be measured by quantifiable metrics. This can result in less focus on subjective but equally valuable skills, such as communication and creativity
• An established performance-based compensation plan can be difficult to change or update. It can also be difficult to end if the program is not giving you the results you expected. This can lead to increased turnover if employees feel cheated out of previously offered bonuses
• Finally, if you don’t ensure your managers apply your pay for performance strategy consistently, it can lead to favoritism. It can also highlight potential deficiencies. For example, certain employees might not meet expectations because they do not have sufficient training

If you want to learn more about pay for performance models, check out this video on our YouTube channel:

We’ve looked at the pros and cons of performance-based pay. Ultimately, though, it comes down to one thing: do pay for performance programs really motivate employees?

Studies suggest that aligning compensation with performance can be a highly effective strategy if you do it well. In fact, organizations that embrace pay-for-performance philosophy are 50% more likely to have excellent employee engagement. Not just because of the financial reward, but also because your employees feel that you value and support their professional development. And this, in turn, improves retention rates and helps you attract top talent to your company.

Firstly, the strategy you use should enable your employees to see a clear connection between the work they do every day and the success of the company as a whole. You need to establish clear guidelines for your program and offer rewards that represent a true incentive. You also need to make sure you implement the program consistently and your managers use the same metrics to calculate payouts across teams.

Related: How to Measure Employee Performance Metrics (with template)

Finally, you need to make sure you align your performance compensation model with your performance appraisals and your L&D strategy . It needs to form an integral part of your corporate culture. Your employees need to feel that continuous learning and development is a core value of your business. To conclude, if the pay for performance models are matched with a company-wide growth mentality, the more you will engage and motivate your employees.

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How to Maximize Results in this Economy: What Makes Pay for Performance Work?

Paying your employees based on their performance is a powerful strategy that can lead to positive results for your business. Not only does it motivate employees to do their best, but it can also help you identify and reward exceptional work aligned with company objectives. 

In today's ever-changing business environment, pay for performance is a powerful strategic lever that can have profound impacts on your organization’s success. It goes beyond sales commissions : performance-based pay is all about extra rewards that motivate employees to reach higher levels of productivity and, more importantly, outcomes.

Because it can significantly impact your bottom line, it's worth taking a closer look at what it is and how you can use it in your own organization. This way, you can start putting together plans that ensure your team gets incentivized properly and appropriately — key ingredients when striving toward mutual growth.

This article will dive into the pay-for-performance compensation model and its pros and cons. We’ll also share the impact incentives have on employee performance and close with how CaptivateIQ fits into the picture.

What is pay for performance?

Pay for performance (or performance-related pay) is a variable pay model where employees can receive more compensation when they meet or exceed specific goals, such as sales volume and customer satisfaction, set by their managers or company executives.

It’s a pretty standard strategic lever for business today as it can significantly improve productivity, morale, and cost efficiency. In fact, according to a recent Salary.com survey , 77% of companies in the United States are using variable pay programs. ‍

The pros of pay for performance

Why do three out of four of companies use some form of variable pay (like performance pay)? Simply put: It works!

There are many pay-for-performance benefits with a successfully implemented program. As this Forbes article suggests, pay-for-performance is a game changer.

Here are some of the “game-changing” benefits.

Increased productivity

Doing more with less is the name of the game in today’s business environment. Increasing employee productivity is one avenue for achieving “more with less.”

One of the best levers for improving productivity is to reward effort. When employees know certain actions will be rewarded, they are more likely to put in extra effort and produce better results. 

A key advantage of a pay-for-performance model is that it incentivizes continuous achievement and success while aligning compensation with contributions.

Enhanced motivation

Discipline is essential for getting work done and staying on schedule — and motivation can inspire you to make it happen.

But only some in an organization are motivated by the same things. Some excel with intrinsic motivators (doing something because it is enjoyable), while others perform better with extrinsic motivators (doing something for financial incentives). Nevertheless, these tangible rewards can motivate a team to work harder, smarter, and more efficiently. 

And there is some data to support this.

Implementing a pay-for-performance compensation model in your workplace can increase motivation and productivity amongst employees.

Improved morale

A motivation-based compensation system helps maintain employee morale by providing recognition and acknowledgment for a job well done. 

Greater clarity around roles and responsibilities

A clear delineation of duties leads to improved efficiency and fewer conflicts among team members. 

Cost efficiency

Underperforming employees typically require more supervision and resources than high-performing ones. However, letting go of underperformers or offering them lower wages can still be expensive for businesses; paying them based on performance can help avoid this issue altogether. 

Competitive advantage

Paying employees based on performance is becoming increasingly common, so those businesses that don't adopt this strategy may find themselves at a disadvantage when competing for top talent.

Higher retention rates

Employees who are rewarded for their work tend to be more engaged and invested in their job. As mentioned above, they are more likely to go the extra mile to do a good job and be productive. 

With incentive plans in place, you can provide for your employees in ways beyond just financial compensation. When employees are recognized for their effort AND rewarded for it, they are inspired to continue to develop their careers in that same workplace . Additionally, when employees feel fairly compensated for their work, they are less likely to look for other jobs, leading to lower turnover rates.

The cons of pay for performance

The pay-for-performance model is not all unicorns and rainbows. Like any plan, there can be disadvantages as well. 

Here are some of the common problems with pay-for-performance.

Wait. Teamwork is a good thing, right? Not so fast.

Teamwork may be less emphasized and incentivized depending on your compensation model. This can result in individuals focusing on their performance rather than the team's success.

An individual-focused approach may work in some organizations, but as they say, teamwork makes the dream work. While most businesses want a unified workforce, you will quickly create a hostile work environment if you pit your staff against each other for incentives.

Quantity over quality

Quality is almost always the name of the game.

Depending on your incentive system, your team may feel that getting more work done and filling quotas is the right approach for more incentives. When implementing your pay-for-performance plan, emphasize the quality of performance, not the quantity .

Focusing on short-term results (a little too much!)

When people are rewarded based on their short-term performance, they may be more likely to focus on tasks that can be completed quickly and easily instead of longer-term goals that may be more difficult but have a greater payoff. Management might also become overly focused on achieving short-term results, which can take away from their investments in employee development and training and ultimately lead to lower productivity and decreased efficiency.

Setting a standard

Once employees become accustomed to incentives, the pay-for-performance model may become “the new norm.”

That’s not necessarily a bad thing. However, if there is a month/quarter/year where your organization does not provide the pay for performance incentive, you may have a mutiny* on your hands.

‍ *Or just a few unhappy employees.

Be sure to scale your incentives with the reality of your business – anticipating down years.

Impact of incentives on employee performance

The impact of incentives on employee performance is quite clear. 

A 2010 meta-analysis conducted [by] the International Society of Performance Improvement (ISPI) found that properly constructed incentive programs increase performance by anywhere between 25 and 44 percent. The same study found that these incentive programs engage participants and help companies attract quality employees. ( Source )

While a pay-for-performance plan may be a deliberate decision on employers' behalf, performance-based incentives examples exist in other places.

For example: In many elementary schools, teachers reward children with toys, stickers, or other forms of motivation for positive behavior. While not the same as more advanced work incentives, the underlying principle is the same. People work harder when they feel their effort is recognized and rewarded. ‍

Performance-based incentives for employees should go beyond stickers and toy box prizes (obviously). 

Unfortunately, simply having the idea to implement a pay-for-performance program is not the same as actually implementing an effective one. Unstructured incentives can have serious consequences. 

There are plenty of bad incentives examples out there. Take cash bonuses. The bonus only comes through if you meet your set quota. This can create an incentive to overreport sales, which can hurt the company. 

Implementing a pay-for-performance system

Pay for performance might be the answer if you're looking to motivate your reps and increase sales output. But cookie-cutter solutions are not the answer — what works wonders for one company could prove utterly ineffective with another business. That’s why it’s critical to tailor commission structures accordingly to ensure maximum impact!

Establishing clear parameters that reflect fair and attainable targets is also critical: you need to provide rewards that feel attainable, so employees remain motivated. 

The same concept holds true when considering merit-based raises — be sure they happen often enough so hard work doesn't go unnoticed or unrewarded! If an employee feels like their hard work will only be acknowledged possibly after an intense year of effort, it may make the pursuit of the goal not feel worthwhile, as the incentive would seem very distant.

Here are some other tips to ensure a successful implementation:

• Define what "performance" means for your company and employees. What are your measures of success? Performance metrics often relate to how well an individual or group is meeting expectations, improving skills, and adapting to changing demands in the workplace or marketplace.
• Clearly outline the expectations and goals of the pay-for-performance system to all parties involved. This includes establishing a timeline for measuring results and determining if the system works as intended.
• Make sure both management and employees are on board with the new system. Manage employee expectations by regularly communicating about their progress and how it relates to their pay.
• Periodically assess the system's effectiveness to ensure it meets everyone's needs. Make changes as necessary.
• Celebrate successes and learn from failures together as a team.

The role CaptivateIQ plays in performance-based compensation

Compensation is often your most significant sales expense. 

It’s also the single most impactful go-to-market investment your organization makes. If managed effectively and efficiently, it can influence revenue generation more than any other business lever. 

Sales reps (95%) agree that the right technology stack is essential to meeting their revenue goals and rank compensation software amongst their most indispensable tools.

That’s why performance-based pay has become one of the most popular forms of incentive compensation. It offers a way to encourage and sustain exemplary performance by providing pay increases based on improvements in productivity, quality of work, or cost savings.

CaptivateIQ empowers businesses to get pay for performance right — for their teams, their goals, and their market — now and in the future.

Learn more about incentive compensation management .

Related Content

The 3-Part Playbook to Becoming a More Strategic Incentive Compensation Leader

Maximizing Performance: The Pros and Cons of Pay For Performance Programs

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How a Pay-for-Performance Compensation Strategy Pays Off

Next to an organization’s strategic planning efforts, dovetailing the compensation philosophy to support the organization’s goals is paramount to success. For example, if quality, experience and a sophisticated skill set are an organization’s strategic advantages, then it will not be successful hiring employees significantly below the market rate for that position.

It is important to review the organization’s strategic plan at least annually, and to discuss basic strategic pay decisions with senior management to ensure the success of the pay-for-performance compensation strategy and prevent serious consequences, such as employee turnover and lawsuits.

Important considerations that should be a part of this ongoing discussion include the following:

Where does the organization want to be in terms of market competitiveness?

In this competitive job market, it is important to be aware of the organization’s competing firms. An organization can lead, meet or lag the market.

• Lag the market.  An organization may choose to offer a compensation package that is valued less than packages offered for a similar job in the labor market. An employer with a “lag the market” philosophy is likely to be at the back of the line when it comes to hiring and retaining employees, especially those with special skills. These problems are the direct result of below-market pay. With the Internet providing pay information with a click of a mouse, employees are less willing to stay and support an organization when they know they are underpaid. Good employees may leave, while less-skilled employees may stay with the organization. Turnover is very expensive. It is estimated to be at least six months’ pay for a non-exempt (hourly) employee and one years’ pay for an exempt (salaried) employee. No organization wants to be a training ground to groom employees for its competitors.

• Meet the market.  This is the most common compensation strategy. This level of competitiveness occurs when an organization’s compensation strategy is equal to the labor market for the same position. This is the pay philosophy that makes the most sense for most organizations. By having a base pay strategy that meets the market, an employer can easily add or subtract variable pay and/or fringe benefits. By selecting this level, employers can balance cost pressures and the need to attract and retain employees.

• Lead the market . The “lead the market” pay strategy can be defined as a total compensation package that is above the labor market for a similar position. This strategy may occur because an organization believes that by paying more, it will receive more experienced employees for the same position (although it has not been proven that a higher salary guarantees higher-quality employees) Organizations may choose to lead the market in good financial times, but it can leave them in a tight spot in a downturn.

Mixed Market Position

This market position is becoming more common as employers are realizing that a one-size-fits-all strategy does not suit their workforce. The following are examples of a mixed market pay policy:

• An organization that is several miles outside a major city may be able to pay lower for their lower-level hourly employees to match a lower cost of living, but may have to pay at market or above market to attract employees to a smaller, more remote city. • An organization has a mix of difficult-to-fill clinical positions and easier-to-fill administrative positions. To compete in a market with an extreme shortage, it may make business sense to pay the clinical positions at least at market or above market and pay the administrative positions closer to below market.

What are the strengths and weaknesses of the organization’s current compensation system?

An important component of market competitiveness is to find answers to the following questions:

• Is the organization able to attract the appropriate skill sets and types of employees when needed? • Where is the organization hiring its best employees? • How long do most employees stay at the organization? • Where do employees go when they leave the organization? • What are the organization’s promotion policies? • Are employees frequently asked to take on new tasks without being rewarded for their efforts? • Do employees value the company’s benefits, incentives, work environment? What of these items should be changed or updated? • What is the employee morale? This information can be gathered from managers, exit interviews, employee surveys and other communication tools. Employee survey feedback, in particular, provides valuable information for moving forward. • What mix of base pay, incentive pay, work environment and benefit levels make the most sense for the organization when considering the competition, types of jobs, niche and labor market available?

How is pay distributed?

How does the organization’s current compensation plan link pay with performance on base pay?

• Is there a pay matrix that rewards high-performing employees with a larger annual merit increase? • How well does the organization’s performance appraisal process work? • Are the organization’s promotional pay policies consistent? • Does the organization review where employees fall on the pay range according to experience, performance and longevity?

How is the organization’s pay system administered?

What are the strengths and weaknesses of the current system? How is your system structured and what do you want to change about the following:

• Number of grades. • Separate scales for different types of jobs such as non-exempt, exempt and executive. • Size of jump between grade mid-points. • Placing a newly created job in the pay range. • Determining how and when a job gets reviewed due to changes in responsibilities.

What are some constraints?

It is too easy for an employer to take a shortcut and not acknowledge that all organizations have to work within some important constraints when managing their pay-for-performance system. There are five major constraints: the organization’s ability to pay; legal constraints; union and non-union issues; the internal labor market and the external labor market.

1. Ability to pay.  Fancy compensation programs are impressive, but the bottom line is that an organization must be able to afford its pay system. This is true in good and in bad financial times. It is critical that design decisions align with the organization’s financial ability to pay. By partnering with an organization’s chief financial offer, it will be easier to develop a plan that makes sense financially.

2. Legal constraints.  In general, base pay plans are regulated by the Fair Labor Standards Act (FLSA), which regulates wages, hours and recordkeeping.

3. Union/non-union issues.  For unionized organizations, pay issues are a mandatory bargaining issue that must be negotiated. Organizations must obtain buy in from union leadership early in the negotiation process to be successful in changing the way they pay their employees.

4. Internal labor market.  This is where internal equity comes into play. Pay plans must motivate employees to want to stay with the organization and, hopefully, take on management roles or higher-level technical roles in the future. To illustrate, an organization can structure a pay plan that will motivate high-level technical employees to move out of overtime-eligible positions into first-line management positions that do not pay overtime.

5. External labor market.  In today’s global market, organizations cannot operate their pay plan in a vacuum. Basic economics of supply and demand affect employee compensation. To illustrate, the amount of education required to become a pharmacist recently changed. To compound the problem, Medicare added a pharmacy plan for senior citizens. This resulted in a shortage in pharmacists and an increase in pay levels for the job.

Collecting information regarding the above compensation questions and issues will give HR professionals a good start in developing a compensation philosophy that can then be shared internally with their employees and externally with the general public, customers and potential applicant pool.

HR professionals should enlist senior management to help champion the compensation philosophy as a working document that can set the stage for the design of a new compensation system.

Sharon K. Koss, SPHR, the author of Solving the Compensation Puzzle , has owned her own HR consulting/compensation firm since 1986. Altogether, she has more than 30 years of HR experience, during which time she completed more than 500 salary plans. Koss speaks regularly on the topics of compensation and general HR and has been on the SHRM Faculty for more than 12 years, and served as chair of the Human Resource Certification Institute.

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Implementing an Effective Pay-for-Performance Model

Emily Barr March 7, 2020 Compensation , HR Professionals , Performance Culture

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Implementing an Effective  Pay -for – Performance  Mode l  

Pay-for-performance compensation describes performance-based pay programs where an employee is incentivized and rewarded for achieving goals or objectives.   

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What is Pay-for-Performance?  

The pay-for-performance model moves away from systematic entitlements when it comes to compensation, and instead signals a more mature and fair approach to employee salaries. It works to drive employee engagement and is also effective in boosting top talent retention.  Despite being a complex model that can manifest in several different forms, hinging on budget, goals, company size, and so on, pay-for-performance can be grouped into two principle categories:  

Merit Pay Increases  

These refer to the increases in an employee’s base pay due to high performance that are typically delivered on an annual basis. They are often already budgeted for, included as part of the annual salary increase budgeting process. This is the  most used  pay-for-performance model, recognizing employee performance and rewarding top performers with an increased base salary for the following year.  

Variable Pay Programs  

These encompass an array of both discretionary and non-discretionary bonuses, varying according to the payout period, employee eligibility, and employee measurement metrics. Unlike merit pay increases, variable pay programs are often administered multiple times a year (i.e. once a quarter), and a mix of different programs are often employed.   

Some variable  pays  programs include:  

Discretionary Bonuses

These are awarded on an ad-hoc basis to the employees demonstrating outstanding performance, and often without consideration of pre-defined goals. This can include:  

• Spot bonuses:  reward employees “on the spot” for achievements that deserve special recognition.  
• Project bonuses:  reward employees for completion or superior completion of a project.  
• Retention bonuses:  usually awarded to long-tenured employees, or employees in “hot jobs”, to decrease their flight risk.  

Nondiscretionary Bonuses

These are awarded when employees, teams, or the entire company meets specific, pre-defined goals. They are based on the duration of the assessment  period and  are considered either  short-term incentives  or  long-term incentives . This can include:  

• Company-wide bonuses:  focused around specific improvement goals for the company, rewarding employees based on how much improvement is made on these goals over a certain period of time.  
• Team-incentive bonuses:  focused around specific improvement goals for one specific team, rewarded based on the performance of that team.  
• Individual incentive bonuses:  based on predetermined, measurable business objectives (MBOs), that are evaluated periodically based on an individual employee’s performance.   

Is Pay-for-Performance Really Working?  

Pay-for-performance compensation can come in many different forms depending on an organization’s budget, compensation philosophy, and organizational goals. However, despite their usefulness in building a competitive compensation plan, very few organizations  have  feasible and effective pay-for-performance models in place.   

The Pros and Cons of a Pay-for-Performance Model  

Despite embracing its concept, many employers claim that their pay-for-performance programs are  failing  in driving and rewarding individual or group performance.  

In a Talent Management and Rewards Pulse Survey  conducted by Willis Tower Watson, a surprisingly large number of North American employers claimed their programs were not accomplishing what they had promised they would do. Specific findings included:  

• Only 20% North American companies find pay-for-performance effective in driving higher levels of individual performance at their organization.  
• Only 32% claimed that their performance-based pay program is effective in differentiating pay based on individual performance.  
• 53% agreed that annual incentives are ineffective in differentiating pay based on how well employees perform.   

The survey also pointed out the discrepancies in employee’s understandings of how merit is specifically measured, with their understandings of the merit-influencing values  not aligning with their employers. For example, two-thirds (64%) of employees claim the managers at their organization   consider the demonstration of knowledge and skills in an employee’s current role when making pay-increase decisions. However, less than half (46%) claim their programs are designed to take these performance indicators into consideration.  

Pay-for-performance models can be great tools in driving performance and recognizing and reward top-performing employees, but only when they are designed and implemented correctly. Traditional thinking on merit-based pay is no longer applicable – companies instead need to define what performance means specifically for their organization, and what managers can do to ensure they are driving the right performance. Re-evaluation the objectives of rewards programs can help to realign pay-for-performance models with their benefits, rather than misaligning them and causing detriments.   

Implementing an Effective Pay-for-Performance Model  

While the concept of constructing and implementing a merit-based compensation model may seem daunting to many organizations, there are several tricks you can use to do it effectively and ensure it is sustainable in the ever-changing job market.   

Most employee performance can be classified into one of the two categories:  

1. Qualitative Performance – activities related directly to customer experience and outcomes, such as sales, customer satisfaction, employee engagement, employee productivity, etc.  

2. Quantitative Performance – activities related to the operations side of the organizations, such as programming, accounting, administration, etc.   

Once an employee’s performance is quantified, it becomes much easier to link their performance to rewards, guiding you towards a fair and flexible pay-for-performance model suitable to your organization.  

Best Practices in Linking Performance to Rewards  

Identify the triggers for top performers..

Not every employee will view higher base pay or bonuses as the ultimate form of reward. Management should recognize what specifically drives engagement and productivity in their top performers,  allocating the annual budget to flow into these triggers specifically.  

Identify clear-cut objectives for employees.

Pay-for-performance heavily relies on both the employee’s and the employer’s understanding of what good performance actually looks like. When the ‘what’ of performance is clearly articulated, employees will have a better understanding of what they’re working towards, making the measurement of performance against your model much more cohesive.  

The Benefit of Linking Pay to Performance  

The objective of any pay-for-performance model should be maintaining a structure that rewards the employees who best contribute to organizational and departmental goals. Establishing fair and consistent practices in how you reward and compensate performance is critical.   

SpriggHR’s Compensation Tools are  an effective solution that helps you to accurately link pay to performance, tracking essential compensation activities and reporting.   

Create a fair and consistent approach to your compensation strategy by establishing adjustments that directly link an individual’s pay raise or bonus allotment to the results of their own performance.   

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The Pros & Cons of Pay For Performance Model

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Key takeaways.

• Pay for performance means an employee is eligible for financial incentives on top of their base salary if they outperform a specific target or goal.
• Performance-based pay can be an excellent tactic to increase employee engagement and motivate employees to exceed expectations.
• Pay-for-performance pay can have drawbacks if implemented without getting regular feedback from employees and relying on HR tech to streamline and facilitate performance management.

Determining the best employee compensation system for a global team is a complex task, given all the factors that may influence your decision: currency fluctuations, local cost of living, tax implications, and employee expectations—just to name a few.

If you’re leaning towards performance-based pay, this guide will help you understand how pay for performance works, its pros and cons, and the best practices for its implementation.

What is pay-for-performance compensation?

Pay for performance, often referred to as P4P, is a strategic compensation approach designed to optimize employee productivity and align it with organizational objectives through a dynamic system of financial incentives.

In this compensation model, employees are motivated to exceed their performance targets as you give them an opportunity to earn more if they outperform the pre-set benchmarks.

Performance-based compensation may include merit-based salary hikes, result-driven bonuses , and variable compensation schemes.

Human resources departments typically participate in the creation of performance-related compensation strategies .

They measure different metrics and KPIs to evaluate the employee’s performance and assign adequate incentive pay to top performers, such as goal attainment, customer satisfaction, or corresponding numerical output (like revenue for sales teams).

💰 Pay-for-performance programs are considered direct compensation and may depend on your employee’s:

• Current type of employee compensation
• Performance goals

Are there different types of performance-based compensation plans?

Yes, there are several types of performance-based incentive pays. The most common are:

• Merit pay: A type of compensation in which a high-performing employee receives a merit-based salary increase , determined by individual performance, achievements, and contributions within the organization.
• Discretionary bonuses: Short-term incentives that an employee receives for outstanding achievement. This type of bonus may include retention bonuses, “on the spot” bonuses, or project bonuses.
• Non-discretionary bonuses: Provided to employees based on specific criteria or conditions established in advance, like achieving certain performance goals (team or individual), meeting sales targets, or attaining other measurable milestones.

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The benefits of using performance-based incentive plans

A 2022 study found that pay incentives can increase job satisfaction, positively affect overall company performance, and reduce HR costs by lowering absenteeism and turnover rates. What are some other benefits of pay-for-performance compensation?

Boosts employee motivation

By directly linking compensation to performance, employees are motivated to excel in their roles and achieve their goals, as their efforts are rewarded with financial incentive programs.

💡 See also:  Can You Give an Independent Contractor a Bonus?

Improves talent acquisition and retention

Pay for performance can attract top talent , as high-performing individuals are drawn to organizations that recognize and reward their contributions. It also promotes employee retention by offering a financial incentive to stay with the company for a longer time. 

Helps with performance management

To properly implement performance-based pay, you need to establish a robust performance management process, which can help easily identify top performers and those who may be struggling and need specific performance measures to improve.

💡 See also: Performance Management for Remote Teams: All You Need to Know

Enhances productivity

Employees strive to improve their productivity and efficiency to earn higher rewards on top of their base pay , leading to increased overall output and performance levels.

Establishes a culture of continuous improvement

The model sets clear performance expectations and goals, providing employees with a well-defined path to success and advancement. Regular performance reviews and feedback discussions encourage employees to continuously improve their skills and performance, fostering a culture of growth.

Aligns with organizational goals

When compensation is tied to organizational objectives, employees are more likely to focus on tasks that contribute directly to the company's success. This model also fosters a culture of accountability, as employees take ownership of their roles and outcomes.

Allows for a flexible compensation structure

With this compensation model, employees can earn more based on their efforts, meaning greater financial incentives for those who excel. Organizations can tailor incentive structures to align with specific roles, departments, or business goals, creating a customized approach that suits their unique needs.

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The downsides of performance-based compensation

Pay-for-performance compensation structure may not be ideal for every organization. Here are some potential shortcomings of this pay model.

Negative effect on teamwork and company culture

Overemphasis on individual performance and rewards can lead to unhealthy competition among employees, damaging teamwork and collaboration.

Solution: Include team-level performance bonuses to balance individual vs. team performance. Involve teams in setting performance goals that align with the organization's objectives. This fosters a sense of ownership and commitment to working together to achieve common outcomes.

Biased decisions

Evaluating performance objectively can be challenging, leading to potential bias in performance assessments. Managers might unconsciously favor certain employees or focus on easily quantifiable metrics, neglecting other important contributions.

Solution: Focus on behaviors and results rather than employee personality. Combine manager and peer reviews to ensure an objective image of each employee’s past performance. Consider calibration meetings with the company HR and leadership teams to ensure everyone’s evaluated objectively.

Exposure to stress and burnout

The constant pressure to meet performance targets can lead to increased stress and burnout, particularly if the goals are unrealistic or the rewards don't justify the effort.

Solution: Set realistic goals and use a balanced scorecard approach where you’ll evaluate different performance dimensions rather than just financial metrics. This will also help employees avoid becoming narrowly focused on the metrics that are directly tied to rewards and neglecting other important aspects of their roles or the organization's overall goals.

Increased disengagement

If employees feel the performance metrics are unfair, unattainable, or not aligned with their responsibilities, they might become disengaged and unmotivated.

Solution: Nurture honest and transparent communication within your team. Create a streamlined system so that employees can leave anonymous feedback if they have any comments or questions about your pay-for-performance plan. Encourage regular one-on-ones between managers and direct reports so that employees have a safe space to share concerns.

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Administration complexities

Designing and managing a fair and effective pay-for-performance system can be complex and time-consuming, requiring well-defined metrics, performance evaluations, and communication strategies.

Solution: Invest in technology solutions that automate data collection, performance tracking, and compensation calculations. This reduces manual effort and minimizes errors. Most HR tech tools also allow you to maintain a centralized database that houses performance data, compensation calculations, and historical records, so the information is readily accessible and organized.

Casey Bailey , Head of People , Deel

Demotivation for average performers

While high performers benefit from the model, average performers might receive minimal increases, leading to decreased motivation and satisfaction.

Solution: Implement tiered pay-for-performance initiatives offering different levels of compensation increases. This ensures that even average performers receive some recognition and motivation. You can also provide a structured plan for employees who are struggling to meet performance expectations and help them progress.

Effortlessly pay your team no matter where they are

Performance-related pay or not, Deel helps you manage compensation for your global workforce in one, unified platform. You can use Deel to:

• Pay your direct employees, international employees, and independent contractors —all under one roof
• Ensure tax compliance no matter where you hire
• Have flexible payroll with extended cutoff dates
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• Manage employee benefits and deductions
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Compensation Packages That Actually Drive Performance

• Boris Groysberg,
• Sarah Abbott,
• Michael R. Marino,
• Metin Aksoy

By aligning executives’ financial incentives with company strategy, a firm can inspire its management to deliver superior results. But it can be hard to get pay packages right. In this article four experts break down the key elements of compensation and explain how to put them together effectively.

When designing packages, boards must make decisions about the proportion of fixed versus variable pay, short-term versus long-term incentives, cash versus equity, and group versus individual rewards. Many look at the copious data available on executive pay and benchmark their plans against those of their industry peers. The mix is also driven by company size, region, culture, and risk appetite.

A good plan always begins with a firm’s strategic goals, however. Is the company striving for profitable growth, a turnaround, or a transformation? Is it trying to compete with public companies as a private entity? Each scenario calls for a different plan design.

The Covid-related economic crisis may also alter plans. If targets become unachievable, incentives will lose their power and need to be revised—offering firms a chance to incorporate measures that serve stakeholders’ interests better.

Principles for designing executive pay

Idea in Brief

The finding.

When executive pay is structured to align with corporate strategy, it can drive better performance.

The Challenge

Many firms struggle to achieve this alignment, and only a few best practices work in all situations.

The Recommendation

The company must start with a clear strategic objective and then consider several trade-offs as it designs compensation packages.

Decisions about executive pay can have an indelible impact on a company. When compensation is managed carefully, it aligns people’s behavior with the company’s strategy and generates better performance. When it’s managed poorly, the effects can be devastating: the loss of key talent, demotivation, misaligned objectives, and poor shareholder returns. Given the high stakes, it’s critical for boards and management teams to get compensation right.

• BG Boris Groysberg is a professor of business administration in the Organizational Behavior unit at Harvard Business School and a faculty affiliate at the school’s Race, Gender & Equity Initiative. He is the coauthor, with Colleen Ammerman, of Glass Half-Broken: Shattering the Barriers That Still Hold Women Back at Work (Harvard Business Review Press, 2021). bgroysberg
• SA Sarah Abbott is a research associate at Harvard Business School.
• MM Michael R. Marino is a managing director at FW Cook.
• MA Metin Aksoy is a managing director at FW Cook.

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Pay for performance: pros and cons of performance-based pay.

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Table of Content

• Introduction
• What is performance-based compensation?
• Are there different types of performance-based compensation plans?
• The pros of using performance-based incentive plans
• The cons of performance-based compensation models
• Implement successful performance-based pay plans

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Many employers have implemented a pay-per-performance compensation model to boost employee motivation to do great work. By establishing performance-based compensation, employers may drive productivity, as employee performance directly impacts pay. However, employers need to understand how performance-based pay works and the pros and cons of pay for performance.

Additionally, there are strategies for successfully implementing a performance-based compensation model that employers should consider to achieve their desired results. Continue reading to learn more about incentivized pay so you can decide whether a performance-based compensation model is right for your business.

Performance-based compensation , or pay for performance, is a payment model that companies use to pay employees based on their job performance. With this model, companies pay employees additional payments for reaching or exceeding goals and objectives. Bonuses are a common example of performance-based compensation, in which the employer gives an additional lump sum of wages if the employee performs well during a specific time. Earning commission on sales may also be an example of performance-based pay. Employers may implement this payment model to increase employee motivation and productivity, potentially benefiting both parties.

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There are various types of pay-per-performance compensation plans or models that employers follow. Three widely-used performance-based compensation models are:

• Discretionary bonuses
• Non-discretionary bonuses

Merit pay is a common payment model that looks like increasing one’s salary based on performance or giving someone a raise. With this model, high performance might be reaching certain financial goals, exceeding expectations, showing excellent leadership skills, and more. With merit pay, raises are typically given yearly to employees who have performed well. Merit pay may also coincide with promotion bonuses.

Discretionary bonuses are a variable pay-per-performance method in which bonuses are awarded for outstanding performance . These bonuses may be allotted if employees go above and beyond their expected duties. With this method, there may not be specific goals employees need to reach to receive bonuses but instead could occur on the spot based on the employer’s discretion.

Non-discretionary bonuses are bonuses for instances in which employees meet specific, pre-determined goals, such as a certain number of sales, active users, or other objectives. These goals may be short- or long-term, company-wide, team-based, or individual.

When deciding if performance-based compensation is right for your business, it’s essential to understand the pay-for-performance pros and cons. As for pros, there are numerous benefits to implementing an incentivized pay plan for employers and employees. Some of the   advantages of administering a performance-based payment model include the following:

Increased motivation

A performance-based compensation model can significantly increase the motivation of employees, providing a tangible reward to work. With the desirable incentive of receiving higher pay, employees are more likely to work hard to accept that reward. When employees achieve goals in this compensation model, motivation and morale are increased even further as one can see the benefits directly gained from their hard work.

Boosted productivity

Productivity may also increase drastically when financial incentives are brought into the mix. Employees are likely to be productive and reach concrete and numerical goals. This increased productivity increases revenue for employers, making it a win-win for everyone.

Improved company culture

When employers reward employees for outstanding performance or behavior, such as excellent leadership skills, employees are more likely to exhibit the positive values expected of them. Additionally, as employees have more control over the wages they will receive, a culture of power balance and equality is cultivated. Pay-per-performance models can help nurture a culture of hard-working and satisfied team players.

Attracting better workers

By offering performance-based incentives, companies are more likely to attract better, harder-working employees. Financial incentives on top of a base salary range can help companies stand out in their industries and receive more interest from talented candidates. Employer-provided benefits are a significant factor in one’s job decision, so don’t overlook the importance of this provision when growing your team.

Less micro-managing

With financial incentives established, employers can rest assured knowing their employees will be motivated to work hard toward their goals. Thus, employers and managers no longer need to micro-manage employee activity. This is a major benefit to employees and employers, as attention and resources can be allocated elsewhere for employers while employees can feel trusted.

Establishing clear expectations

Having a pay-per-performance model with concrete goals sets clear expectations for employees. In other work models for which clear goals are not established, employees may need help knowing where to allocate their efforts or whether they are doing their jobs well. With clear, established guidelines, employees are more likely to feel confident in their roles and know they are carrying out their expected duties.

Higher employee retention

In addition to attracting top talent, having performance-based incentives can help businesses retain employees. As employees reap the rewards of their hard work under a pay-per-performance model, they are more likely to remain happy, loyal employees. Additionally, employees are more likely to feel supported by a company culture of less micro-managing, clear expectations, and improved leadership. Higher employee retention reduces business costs in the long run, making this a valuable asset to employers.

While performance-based compensation models can bring many pros to the workplace, they also come with disadvantages. Understanding the advantages and downsides of incentive-based models is essential to discern whether they are suitable for your business. Some of the disadvantages of pay for performance include:

Quantity over quality

With numerical goals and objectives established, employees may focus on quantity over quality when working toward financial rewards. To avoid this issue, employers may also want to establish qualitative goals to go along with the quantitative ones. For example, higher-quality customer reviews and a set sales goal may be a more comprehensive objective for employees to strive towards.

Individualism

Another disadvantage of pay for performance is that employees are more likely to focus on reaching individual goals than setting goals together as a team. In some instances, employees may even put each other down to be the ones to reach their rewards. This is why having team-based incentives may be a smart idea when considering a performance-based compensation model.

Unclear goals

While establishing clear goals and objectives helps employees feel confident in their duties, having clear goals can be beneficial. For example, discretionary bonuses may be allotted on an ad-hoc basis at the discretion of employers, with no concrete goals involved. As a result, employees may feel lost when acquiring bonuses or raises, decreasing motivation, and morale. Additionally, more qualitative goals, such as improved leadership and communication, involve more subjectivity, which can confuse employees. Overall, employers need to be clear in their incentive payment model goals. Otherwise, the strategy can backfire.

Increased employment costs

While increasing productivity and employee retention can decrease employment costs in the long run, a poorly-implemented pay for performance model can do the opposite. If your pay for performance model decreases morale, motivation, and, thus, employee retention, your only result might be increased employee wages and benefits. To establish a successful performance-based compensation strategy, continue reading our expert tips below.

When establishing a performance-based compensation plan, it’s essential to get it right to achieve the full benefits for you and your employees. To ensure your pay for performance strategy is successful , consider including the following elements:

• Clear goals: The milestones for obtaining a financial reward must be clear. For example, numerical goals would classify as clear goals. While a goal like "increase revenue" remains broad and subjective, a goal like "increase revenue by 22%" is clear and definitive. Having distinct goals helps employees feel confident in their work.
• Transparent performance evaluation process: The process for evaluating employee performance should also be clear. This might look like having quarterly reviews on set dates throughout the year so employees can know whether they are on the right track. Additionally, the evaluation process should be provided to employees in writing once the program commences, including how employers will determine if goals are met.
• Tools to track performance: Using digital tools is essential for performance-based plans. With a unified progress management tool, employees and employers can remain on the same page throughout the year. Additionally, employees can easily receive feedback from having the opportunity to improve their work before the goal date arrives.
• Qualitative goals: Employers should also consider implementing qualitative goals, such as outstanding work ethic, leadership, and other behaviors. However, employers must have clear guidelines for evaluating these non-numerical goals.
• Team-based goals: To avoid hyper-individualism in the workplace, employers should consider establishing team-based incentives. This way, entire teams will be more motivated to work together amicably toward one ultimate goal. ‍
• Fairness: Employers must stick to their word and provide the promised rewards. Additionally, employers must be fair to all employees, evaluating them on equal levels. Failure to be equitable can decrease employee retention, which is the opposite of what businesses strive for.

Establishing a pay-for-performance compensation model can be incredibly beneficial to one’s business. However, employers need to create clear and equitable performance-based compensation programs for this strategy to increase motivation, productivity, and morale. Skuad helps companies quickly pay and manage their global teams , so business owners can focus on what they do best. Schedule a demo today to learn how Skuad can take your business to the next level.

About the author

Nathan Williams is a Global Payroll Specialist and Finance Consultant. With a background in banking and finance, he is passionate about modern tech practices in payroll management and using global payroll platforms for global payments.

September 13, 2022

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Frequently asked questions about pay-for-performance compensation plans

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Pay for Performance - Explained

What is pay for performance.

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Table of Contents

Pay for Performance is a compensation strategy that uses salary, bonuses, or other benefits to directly incentivize employee performance. Employee Performance is generally measured by pre-defined metrics or qualitative evaluations (performance appraisals).

Back To : MANAGEMENT

Pay for Performance Compensation Plans

Pay for Performance compensation plans are commonly employed in industries where the actions of the employee result in revenue by the company and the results of those actions are readily ascertainable. For example, individuals working in sales or business development commonly compensated based upon performance - as their performance leads to increased customers, clients, or sales revenue for the company. 

Pay for Performance compensation plans are very helpful for a company if it implements them effectively. It can meet the following objectives:

• Employ and retain the best quality workers
• Convey and reinforce the goals, values and motives of the company.
• Engage workers in the success of the company
• Benefit value creators

Moreover, the rewards policies instituted by a company as part of a pay for performance plan should assist employees in understanding:

• Company Vision : where the organization heads. e.g. foxfire
• Company Strategy : how is the business going to reach them
• Employee Expectations and Roles : what kind of role is assigned to each employee in the plan and what does the company expect from him/her.
• Employee Rewards : how employees get financial benefits and rewards from the expected achievements linked to their roles.

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Annual Incentive Plans – Payouts and Performance Alignment

Melissa Burek is a Founding Partner and  Michael Bonner is a Principal at Compensation Advisory Partners. This post is based on their CAP memorandum.

CAP analyzed annual incentive plan payouts over the past ten years of 120 large U.S. public companies, with a median revenue of $43B. We selected these companies to span ten major industries and provide a broad representation of market practice. This study is a continuation of studies that we conducted in  2017  and  2020 .

Annual incentive plans are an essential tool for companies to incent and reward executives for achieving short-term financial and strategic goals. The goal-setting process has always challenged management teams and committees to achieve a balance between rigor and attainability to motivate executives.

In recent years, economic volatility has placed even more pressure on committees to set appropriate goals. This research is intended to be a guide and a reference point to help evaluate whether goal-setting has led to the right outcomes.

Summary of Findings

Plan design.

For the purposes of this study, we categorized annual incentive plans as either goal attainment or discretionary. Companies with goal attainment plans set threshold, target, and maximum performance goals and corresponding payout opportunities for the performance period. Companies with discretionary plans determine payouts at year-end based on a retrospective review of performance results with no predefined relationship between goals and payouts.

Our study focuses on the 89 percent of companies in the sample with goal attainment plans.

Performance Metrics

Nearly three-quarters of the companies in our study use three or more metrics to determine bonus funding, an increase compared to the findings of our 2020 report.

The most prevalent financial metrics used in annual incentive plans were Revenue, EPS, and Operating Income (including EBIT, EBITDA, and Pre-tax Income).

57 percent of companies in our current study use strategic or nonfinancial goals, an increase from 38 percent in 2020. These metrics incentivize behaviors that contribute to long-term success but may not be captured by short-term financial performance results. Specific strategic or nonfinancial metrics vary by industry and company – for example, pharmaceutical companies often use pipeline metrics and oil and gas companies often use safety and environmental metrics.

60 percent of the companies include Environmental, Social, and Governance (ESG) goals as part of their annual incentive award determination. ESG metrics are typically evaluated on a qualitative basis, and less commonly on a quantitative basis.

Performance and Pay Scales

Compensation committees annually approve threshold, target, and maximum performance goals and corresponding payout opportunities for each metric in the incentive plan. Target performance goals are most often set in line with the company’s internal business plan. Executives most often earn 50 percent of their target bonus opportunity for achieving threshold performance and 200 percent for achieving maximum performance. Only two companies in the study provide an award opportunity over 200 percent of target for achieving maximum performance goals, a decrease compared to our 2020 report.

Annual Incentive Plan Payouts Relative to Goals

All Companies

Based on CAP’s analysis over the 10-year period, the degree of “stretch” embedded in annual performance goals translates to approximately:

• A 95 percent chance of achieving at least Threshold performance
• A 70 percent chance of achieving at least Target performance
• A 5 percent chance of achieving Maximum performance

This shows that participants are achieving threshold performance and earning some payout 95 percent of the time and receiving maximum payouts 5 percent of the time by achieving superior results. These findings reinforce the importance of performance goal settings, as companies are spending annual incentive monies equal to at least the amount of their overall target pool about 70% of the time.

In most of the years reviewed in our study, between 60 percent and 80 percent of companies paid bonuses at target or above. There were two exceptions: 2020, when only 55 percent of companies paid bonuses at target or above, and 2021, when 89 percent of companies paid bonuses at target or above. In 2020, bonuses were generally down due to the unanticipated impact of the COVID-19 pandemic on financial results, while in 2021 bonuses increased due to a faster than expected rebound for most companies. In 2022, we saw a return to more typical payout distributions with 65 percent of companies paying bonuses at target or above.

Impact of COVID-19 and Adjustments Made in 2020-2021

Given the unique economic environment, companies made more adjustments to annual incentive payouts in 2020 and 2021 than in prior years.

In 2020, 27 percent of companies made adjustments to annual incentive payouts. Approximately half of the companies adjusted bonus payouts upward to acknowledge that executives had limited control over the pandemic’s impact on financial results and to recognize efforts in navigating through the challenging environment. The other half of companies adjusted annual incentive payouts downward to realize the unplanned benefit that some companies realized as a result of the pandemic.

In 2021, 13 percent of companies made downward adjustments to annual incentive payouts to recognize that the results exceeded goals because of a quicker-than-expected financial rebound.

The trends seen in the 2020-2021 period reflect a dynamic response to the rapidly changing economic landscape and emphasize the importance of adaptability for companies when navigating unprecedented times.

By Industry

Payout distributions differ by industry based on a variety of factors, including metric selection, goal setting, and economic influences. Average payouts for each industry are distributed as indicated in the following chart:

Pay Relative to Performance

CAP reviewed the relationship between annual incentive payouts and annual company performance over the ten-year period with respect to growth in the three most common annual incentive plan metrics: Revenue, EPS, and Operating Income. Payouts were fairly aligned with all three metrics over the 2013-2022 period, indicating that companies are rewarding for both growth and operating efficiency. Aligning bonus payouts with profitability also helps ensure that outcomes consider a company’s ability to pay bonuses.

The chart below depicts the relationship between median Revenue, EPS, and Operating Income Growth and the prevalence of above-target annual bonus payouts among the sample.

Our research indicates that over the last ten years companies set performance goals that translated to:

While payouts in select years may diverge slightly from others, given economic, industry, or company factors, this overall 10-year lookback provides a pattern and guidelines that companies can use to assess their actual payouts and established goals over the longer-term.

Looking Ahead

The macroeconomic environment remains uncertain, given factors such as the rising interest rate environment, continuing high inflation, a tight labor market, stock price volatility in certain sectors, and supply chain uncertainty.

Companies can use design strategies to help reduce volatility in their plan payouts, including setting wider ranges around target to recognize the challenges of setting performance goals in an uncertain environment, using non-financial goals to tie annual incentive payouts to other markers of company progress, and adding relative measures, which will allow for relevant comparisons even if the overall market is affected by macroeconomic challenges.

Methodology

The 120 companies in our study had a revenue size ranging from $20 billion at the 25th percentile to $88 billion at the 75th percentile. Median revenue was $43 billion.

CAP reviewed actual annual incentive payouts earned for performance over the ten-year period from 2013-2022 to determine the distribution of incentive payments and the frequency with which executives typically achieve target payouts. In this analysis, CAP categorized actual bonus payments (as a percentage of target) into one of six categories based on the following payout ranges:

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Are Performance Improvement Plans Actually Effective?

Too often, PIPs take the place of effective management.

Jeff Riseley never forgave his first employer for placing him on a performance improvement plan.

He had been with the company for less than a year, and his first few months couldn’t have gone better. He crushed his quotas and outpaced all expectations for a new hire, earning him a reputation as a star in the making. But then the anxiety and stress of the job started to take their toll , and his performance suffered. 

If his manager had asked him what was wrong, they might have learned that he was struggling with panic attacks and insomnia that hampered his performance. Instead, they slapped him with a performance improvement plan with a target quota five or six times higher than what the average sales rep sold, Riseley said.

“They were essentially saying, ‘We know you’re not going to hit it because we want to fire you with cause,’” Riseley said. “I used that as pure anger and rage, like, ‘This is not how this is going to happen. I’m not going to be let go because of what this company is trying to do.’” 

3 Steps to Take Instead of Relying on a Performance Improvement Plan

• Set expectations early and often. Create a list of expectations before you hire someone for a role and make sure you communicate those to the employee throughout the hiring process.
• Host transparent one-on-ones. Create a clear agenda for meetings and use that time to address any performance issues early and often. 
• Know when to part ways. Always come with solutions, but if an employee doesn’t think there’s anything more they can do to fix their struggles, it may be time to discuss an exit plan. 

Riseley went on to crush his target quota and eventually earned a trip to London for his performance. But he never forgot the performance improvement plan, and once he earned enough money, he quit.

Riseley’s experience isn’t unusual for a sales rep. It’s emblematic of what sales consultant Amy Volas believes is wrong with performance improvement plans. While they are intended to be a last resort to help struggling reps get back on track, they’re more often used as a crutch for poor management or to jettison an unwanted employee.

“I’m not a fan, and I have rarely seen that they work well,” Volas said. “It screams lack of communication and a lack of leadership if that’s what you pull out when the going gets tough, and it’s a surprise. And in a lot of scenarios, it is a surprise.”     

As the sales leader and founder of Avenue Talent Partners, Volas doesn’t believe in using performance improvement plan when a rep struggles. Instead, managers should develop a transparent relationship from the hiring stage on.

What Is a Performance Improvement Plan (PIP)? 

A performance improvement plan is a formal document managers give to an employee who has consistently failed to meet their quota or performance metrics. It’s typically used as a final warning before the rep is fired and includes a set of tasks and benchmarks that the employee must meet to return to good standing within the company, Volas said.

“Through the course of my career, which is a long one in sales, how I’ve typically seen the performance improvement plan used is there is somebody that’s struggling on the team, and it’s a way of having a defining-moment conversation to see if things can improve,” Volas said. “And if they can, great. If they can’t, we part ways.”  

The objectives within a PIP are meant to be prescriptive, taking into account where an employee is struggling and helping them bridge that gap. So if an employee struggles with outreach, a PIP might include attending additional cold calling training , making a certain amount of cold calls a week and booking a certain amount of meetings for the month. 

But not all PIPs are equal. Some, like in Riseley’s case, can include unattainable goals that are designed to push the employee out. Even when a PIP is well-meaning, Volas believes it still isn’t the most effective strategy to help a struggling employee. The onus to improve is often placed on the sales rep, however, reps rarely succeed or fail on their own.  

Who’s Responsible for Poor Performance? 

When a manager places a sales rep on a PIP, it’s usually because the employee has underperformed for too long. The plan represents a career crossroads — either improve your performance or find a new job.

But the situation that landed the rep on the PIP is rarely that straightforward, Volas said. 

She recalled a colleague at a previous job who was placed on a PIP after the manager changed their book of business. They had an easy collection of accounts that didn’t require a lot of work to reach quota. When that changed, the rep’s performance faltered.

The employee was frustrated because the manager changed their accounts without telling them. But the manager was also frustrated because it was clear to them the employee wasn’t putting in enough work to succeed, Volas said.   

The truth was, both were to blame.

“[The rep] was blindsided, and the leader was over [the rep],” Volas said. “I remember the leader saying to the person, ‘Do you want to just resign already because you’re never going to be able to get through this?’ Everybody had a part in the story. Everybody had responsibility for it, and nobody did the right thing.”

The experience underscores the seedy underbelly of some PIPs, Volas said. On the surface, a PIP is meant to outline the steps an employee needs to take to become a high-performing team member again. It might have a goal like quota or conversion rate attached, as well as steps to achieve that goal. 

“The most common association is, ‘I’m failing, and you’ve decided that I don’t have a job here anymore. Or you’re trying to push me out.’”

But in some cases, managers use PIPs to drive out unwanted sales reps. In others, they use the PIP as a crutch to avoid doing the work to help the rep thrive, Volas said.

Of course, not all PIPs are like that. In a well-oiled sales org, managers set clear expectations around employee performance. A rep is only placed on a PIP if they miss their number and they aren’t meeting their other KPIs to maintain a healthy pipeline, Volas said. The plan then focuses on actionable steps they need to take to bolster their accounts and close more deals. In those situations, success stories of reps working their way off PIPs are common.

Still, it’s hard to erase the stigma of a PIP. 

If the PIP isn’t communicated properly or the manager isn’t committed to supporting the rep, employees quickly tune out. They’ll feel shock, anger and fear at being placed on an improvement plan. While they might take steps to improve, they’ll have one foot out the door. 

“The most common association is, ‘I’m failing, and you’ve decided that I don’t have a job here anymore. Or you’re trying to push me out,’” Volas said. “Because a lot of the time, it’s too late to do the things you have to do in a PIP in the timeframe they want you to do them in.”

While managers need recourse to hold sales reps accountable, Volas believes there’s another way to do it — without the pressure of a PIP.

Read On How to Bounce Back After Missing Quota

Set Expectations Early and Often  

Everything starts with the hiring process. 

Before Volas posts a sales job, she maps out exactly what work needs to be done and what the buyers need from the rep. She’ll also think about what it looks like when a person struggles in the role. Answering those questions helps her create a job description with clear expectations, so the candidate knows what it will take to succeed. It also helps her identify what skills a sales rep needs to thrive.

All of that information then gets translated into her  hiring scorecard , which allows her to evaluate each rep’s strengths and weaknesses during the interview stage. Since no new hire is perfect, she looks for candidates who possess at least 75 percent of those skills. 

The remaining 25 percent forms the foundation for hiring conversations and onboarding. Volas lets new reps know where they struggle, what work she’ll do to help them improve in those areas during onboarding and what they need to do to succeed. 

“I’m not here to sell you on the job, I’m here to confirm or deny whether it makes sense for us to work together,” Volas said. “Does it help you get better in your career? Can you help me grow the business? When the answer is yes, good things happen.” 

Establishing this foundation from the get-go creates a dynamic where there are no surprises about the role. The candidate knows exactly what to do to be successful and what will happen if they don’t take those actions. 

“If you’re not talking about this stuff now, you deal with it later. And it costs you a heck of a lot more.”  

It also sets the foundation to have tough conversations about performance in the future.   

“If you’re not talking about this stuff now, you deal with it later,” Volas said. “And it costs you a heck of a lot more.”  

Host Transparent One-on-Ones

When Volas first stepped into a sales manager role, she assumed that whenever someone had a problem, her way of doing things was the best way to solve it. She quickly learned that’s the worst approach a sales leader can take.

Every rep wants to be understood on their own terms, and they may have their own solutions that work best for them, Volas said. Refusing to hear them out was a quick way to lose trust.

Since then, she’s learned to approach one-on-ones with an agreed-upon agenda. The agenda contains all of her notes from previous meetings with the rep and updates on any issues the sales rep brought up. For example, if a rep noticed customers were frustrated with the product’s lack of a particular API configuration, Volas would take note and come prepared with an update from the product team.

“You can’t just go in and say, ‘Tell me about your pipeline.’ That tends to shut people down.” 

The document also contains agenda items for the sales tasks the rep has agreed to work on. This helps create a structure for the meeting and ensures that both she and the rep are held accountable for their given tasks. 

But before she digs into the agenda, she makes sure to ask the rep how they’re doing. This gives them the space to bring up any personal issues they may be going through. 

“We’re in this together, we’re human. Sales is hard, and the pandemic made it a lot harder,” Volas said. “You can’t just go in and say, ‘Tell me about your pipeline.’ That tends to shut people down.” 

She’ll also make sure she’s vulnerable with her reps when she’s having a bad day or when she’s made a mistake. Conversations like that help her establish trust — she can learn whether the rep is really struggling or just needs some time off.

After all this, they’ll dig into the agenda. If there are recurring struggles, she’ll ask the rep what’s going on, why it’s happening and how they’re thinking about addressing it. She’ll also offer her suggestions and steps she can take to help.

In that way, performance improvement becomes a continuous discussion with the rep, rather than an ultimatum. It allows her and the rep to get on the same page and commit to an ongoing plan for improvement.

“If I can open people up, that’s where the work is being done, and I don’t have to rely on a PIP,” Volas said. “It’s not a surprise. I can say, ‘You’ve been falling short. I’m not sure if you realize this, but this has been a common theme in our last four calls. What’s going on?’ And I listen.”  

Read On Sales Leaders Are Setting SDRs Up for Failure

Know When to Part Ways 

Volas has a policy when it comes to a struggling employee: If she cares more about the rep’s success than the employee does, it’s time to part ways . 

When it comes to having a difficult conversation with a chronically underperforming rep, it’s never an “or else” situation, Volas said. She’ll reiterate what the expectations were for the job, then ask what’s going on and whether they can fix the issue. 

Everything depends on their answer. If they say they can fix it and they’re committed to doing what’s necessary to improve, she continues to work with them.

But that’s not always the case.

In one situation, Volas had a rep who was not having enough conversations to fill up their pipeline. She tried several tactics, like helping them identify key people to talk to, coming up with a list of reasons a customer wouldn’t want to engage and pairing the rep with a mentor. 

But over several months, they showed no signs of improvement. In fact, they used the time with the mentor to complain, Volas said. When she asked the rep what was going on, they told her they were doing the best they could. 

“You have to really listen to what people are telling you,” Volas said. “If they’re saying, ‘I’m doing the best that I can,’ I can’t do anything with that because they’re not willing to make a change.”

It’s then, after many conversations on the subject and several attempts to improve, that she lets the rep go, paying them their full month’s salary and any commission they earned.

It doesn’t always have to end that way, though.

“The approach I subscribe to is that there are no hidden surprises.”

Volas recalls one employee in a customer-facing role who was struggling. Volas, who managed the rep’s manager, went to visit her and ask what was going on. Volas learned that the employee was struggling with rheumatoid arthritis. The barometric shifts in the air at her location triggered the symptoms and made it difficult for her to perform. 

Volas helped the employee relocate to a new city, and her performance improved 180 degrees, Volas said. 

Ultimately, there are always going to be employees who just don’t fit the job and others who are simply going through a rough patch. If you resort to a PIP every time, you may end up driving the wrong employees out, Volas said.

“The approach I subscribe to is that there are no hidden surprises,” Volas said. “I’m a big believer of communicating early and often and setting expectations. If there is something going on, nip it in the moment.”

“I find people hide behind PIPs because they are not having these kinds of conversations,” she continued. “When [managers] say they want to be in leadership, this is the work we’re talking about.” 

Recent Sales Articles

I'm a manager who has put several people on performance improvement plans. Here's why you should see it as a positive opportunity.

• A PIP outlines an employee's deficiencies and provides a roadmap for improvement.
• Managers may use a PIP to help an employee improve or to manage them out of a role.
• A PIP can be an opportunity to elevate your skills or assess your commitment to the job and company.

A performance improvement plan — or a PIP — typically details an employee's deficiencies, failures to meet job goals, or issues with behavior. It should also provide a road map and timeline for rectifying these failures.

The plan typically outlines skill gaps and lack of goal achievement, including steps to improve performance and meet expectations. A PIP is not delivered for a one-time issue but for habitual failure to perform job tasks.

As a manager of global credit and collection teams for over two decades, I've issued several PIPs and learned how to navigate the process properly.

Here's what managers really want you to know and how you should reframe the process.

What does a PIP actually mean?

If you receive a PIP, study the document and allow time to process your emotions . It's easy to feel like you're being threatened or like you are a failure at your job. But you can't let your thoughts and feelings get the best of you. You need to start acting proactively — and quickly.

First, you need to assess what the company really means in giving you a PIP. You can do this by simply analyzing how your manager presents the PIP and if they offer assistance in completing the plan.

In many cases, the company might just be trying to manage you out of the role — for a variety of reasons. But in other situations, you may simply not be performing up to par, and they want to ensure you get the necessary skills to succeed.

Do you still want the job?

If you believe the company actually wants to see you succeed and help you, then you should ask yourself a series of questions. First, it's crucial to consider your own goals.

Ask yourself: How strong is my commitment to this job and the company? Is this my dream job ? Is there a possibility of advancement? How much have I invested in this company? Do I like and respect management and the company's mission statement, commitment to diversity, and corporate social responsibility?

Related stories

Think of this as a chance to really analyze your feelings about your job and career.

Once you answer these questions, you can move forward.

I once presented a PIP to one of my employees. They were keen to improve their skills and were committed to the company. Together, we made an attainable plan.

In another case, the employee was simply in the wrong role and was more suited to another job function. They felt more suited to customer service instead of collections, so in lieu of the PIP, they transferred to another department.

Once you understand what you want from the company, you can move forward.

How do you succeed and keep your job?

If you are committed to the role and the company and want to survive the PIP , you should first study the timeline for improvement goals to ensure they are attainable.

Next, you should objectively evaluate your skills and performance gaps. Once you understand the skills you need to succeed, create a plan for yourself on how to obtain those skills. For example, get advice from other team members with those skills and ask them how they do it. Ask if there are any resources or support at the company that will teach you the skills you are missing.

In each meeting with your manager , highlight your progress and show them what you are learning. Don't forget to document all meetings and conversations regarding your progress.

Lastly, don't be afraid to ask for an adjustment of the timeline or the goals — as long as you are showing progress.

A PIP can be seen as a positive opportunity

A PIP can become an opportunity to learn or even elevate your skills. It can lead to success. It is also a check-in on your commitment to the job and the company.

You should either believe you can survive the PIP and thrive in your current position or choose to work elsewhere.

If you think it's time to quit, o rganize your résumé and references and start job hunting. If you want to stay in your position, get ready to work hard.

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Navigating the Fundamentals of Performance-Based Pay

Written by Salary.com Staff

April 15, 2024

Businesses are finding ways to reward employees for their hard work and efficiency. One way they are doing this is through performance-based pay. It is a and serves as a powerful incentive for driving results. For this reason, it is important for businesses to understand how it works and why it matters.

This article navigates the details of performance-based pay. It discusses its functions within a workplace setting, and the compelling reasons why organizations must consider implementing it.

Understanding Performance-Based Compensation

Performance-based compensation connects employees' pay directly to how well they do their job, rather than just how long they have been working at the company or what their job title is. In simple terms, the more they work hard and help the company succeed, the more money they earn. This method is a huge encouragement for employees to do their best and keep improving. It makes sure everyone is treated fairly and encourages them to keep giving their best effort. When employees are happy and motivated, it helps the company do better, reaching its goals and making everyone proud.

How Performance-Based Pay Functions

Performance-based pay works by connecting rewards directly to how well individuals or teams perform. Here is how it usually happens in a company:

• Establishing Clear Performance Metrics: Companies decide on specific goals to measure how well people are doing their jobs called performance metrics or key performance indicators (KPIs). These can change depending on the job and what the company wants to achieve. They often include sales goals and how happy customers are. It considers factors such as the completion of a project, or how good the work is as well.
• Setting Performance Goals: Employees and their managers work together to create goals that they can measure and reach, but which are equally challenging as well. These goals act as markers to see how well employees are doing in their jobs.
• Regular Performance Evaluations: Regular performance evaluations are often conducted annually or biannually. During these assessments, employees look at their own work, get feedback from coworkers, and hear from their managers about how they are doing.
• Rewarding Performance: After checking how well employees are doing their jobs, they get rewarded based on their performance. This can mean getting a raise in pay, a bonus, a promotion, or other perks. Companies typically reward high performers more generously than those who fall short of expectations.

Advantages of Implementing Performance-Based Compensation

Introducing performance-based pay offers numerous benefits for both the company and its workers. Here are some strong reasons to go for it:

• Motivating Employees: Performance-based pay serves as a powerful motivator for employees to excel in their roles. When how much they get paid is connected to how well they do their job, it makes them want to work even harder to do a great job and be the best they can be.
• Aligning Incentives with Organizational Goals: With performance-based pay, employees make sure their efforts help the company reach its goals. When they receive rewards for contributing to the company's success, they concentrate on activities that improve the company, which yields to positive outcomes.
• Encouraging Accountability: With performance-based pay, employees feel more responsible for their work and the results they achieve. This is because their pay depends on how well they perform.
• Attracting and Retaining Top Talent: By using performance-based pay, companies can get and keep the best employees in a tough job market. Employees who perform well prefer to work in environments where they know their efforts will receive recognition and rewards. Performance-based pay helps companies find and hold onto talented workers.
• Driving Continuous Improvement: Performance-based pay inspires employees to find better ways to do their job and help the company succeed. This creates an environment where people are always learning and improving.

Embracing Performance-Based Pay Principles

Performance-based pay is a smart way of paying employees. It means that the better they work, the more they get paid. Linking pay to performance encourages employees to work harder. It aligns their goals with the company's objectives and ensures everyone takes responsibility for their work. More than that, this aids in attracting and retaining top talent and drives continuous improvement. In today's tough business world, using performance-based pay can help companies succeed and grow.

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6 chatgpt prompts to manage underperforming team members.

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6 ChatGPT prompts to manage underperforming team members

It’s your business and it’s your name above the door. Your reputation is on the line. It’s your problem if things don’t work out. But entrepreneurs can forget that they are in charge. They hire too quickly, believing they are in a rush. They let the wrong people in, hand over tasks, and sink time and energy into making it work. But sometimes it just doesn’t work. Sometimes someone is underperforming and you have to do something about it.

Make a plan for underperforming team members, so they improve or leave without wasting any more energy. Copy, paste and edit the square brackets in ChatGPT, and keep the same chat window open so the context carries through.

Improve Your Business: ChatGPT Prompts For Managing Underperformers

Check your facts.

You might suspect someone is underperforming, but do you know for sure? Suspicions and hunches just won’t cut it for having a conversation or making a plan. You need data, figures and facts that stand up to questioning. Show me where you specifically instructed someone to do something that they failed to deliver. Bring proof that your instructions were solid, and they just didn’t listen. Use this ChatGPT prompt to make absolutely sure the problem isn’t you.

“I suspect a team member, who we’ll call [enter fake name] is underperforming. Before I address this with them, help me make sure I have a case. Open a dialogue where you act as an HR consultant and ask me questions, one by one, about why I suspect their performance isn’t where it should be. Require that I draw on specific examples with evidence. Start with asking why their performance has come into question, and progress to understanding every reason.”

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Google makes a major new sale offer to pixel 8 buyers, drugs like ozempic and mounjaro could treat other conditions here s what scientists are looking at, define the standards.

How defined are the standards for your team member’s work and your company as a whole? Do you have your goals, mission and ethos clearly defined? Could a stranger observe your company in action and know what you stood for? If you don’t know the vision, there’s no chance anyone else does. If someone is underperforming, they are not hitting the level of actions, service or results you expect of them. Understand your principles inside out, so you can reference them when assessing your team member and holding the conversation.

“Help me define the standards I set for my company, so I can be certain when someone isn’t hitting them. I will paste information from my [somewhere that describes your company, for example your about page], as well as my [somewhere that defines your personal ethos, for example your LinkedIn summary]. From the information, come up with 10 company principles that define how we operate, what we stand for, and how we go about our work. Present these 10 and ask me which are accurate and which should be changed, then keep going until we have a final 10. Present the 10 in a three-column table where column A is the name of the principle, column B is how someone adheres to this principle, and column C is the opposite of this principle. [Paste information].”

Practice what you preach

Now you have your company principles, check that you abide by them. Continue the chat with ChatGPT, asking it to quiz you on how you stand up to the rules you made. Be completely honest. Figure out where you’re leading by example and where you have work to do yourself. Once you have checked your facts, made your principles, and checked your own performance, you’ve set the foundation to let excellence ensue. The last thing you want is to have double standards.

“Quiz me about my adherence to these 10 principles. Go through each one and ask me to say how I feel my work, results and attitude adheres to each one. After I have answered all 10, highlight my strengths as a leader as well as three possible areas for improvement. The goal is that I run my company in accordance with the high standards I set for the work of everyone in my team.”

Prevent issues escalating

No one should be surprised to receive a bad appraisal. Team members should know as soon as they veer off course, otherwise problems escalate to the point of no return. A performance improvement plan is the last resort, but leaders can leave issues to bubble under the surface, not calling people out because they want to be liked. Stop that happening by being better at nipping it in the bud. Practice being assertive and sorting subpar work or the wrong attitude as the strong and confident person you are. Use this prompt to practice saying what you mean.

“I sometimes have trouble calling people out on issues early on, and want to improve. Help me practice. Simulate a series of scenarios, one by one, where a team member messes up, and ask for my actions and what I would say. When I explain what I’d do, assess my answer for assertiveness and make suggestions on phrases I could use to better get people back on track. The goal is to pull people up on subpar behaviour right at the start, so it doesn’t escalate and cause a problem in my business.”

Draft the improvement plan

If someone is underperforming, things can’t stay as they are. You’ve worked too hard to get here, you’re not about to let one bad egg ruin it for everyone else. Set the intention and make a change. Use ChatGPT to create a draft performance improvement plan, to get them back on track or highlight where they’re still falling short. Approach this with compassion; create a fair document and make sure they know you’re on their side. Address the tasks specific to their role and use the examples from the very first prompt.

“Now you know why I suspect someone is under performing, plus the goals and vision of my company and the standards we set for the work, draft a performance improvement plan for [fake name used earlier.] This should highlight areas for improvement over the next [duration, for example 30 days]. Present the plan in a four-column table, with a title of each area, the standard expected, where I believe they have fallen short and the actions that need to happen to bring this back on track. Before drafting the table, ask questions about the [number] areas to gather information.”

Prepare for the chat

You have your plan and you know what to do. Now to have the conversation. Don’t tiptoe round the edges, arrange to chat and state your case. Get ChatGPT’s help in setting up the meeting, opening the discussion and seeing it through to a productive outcome. Pre-empt their questions, and concerns and leave with everyone knowing where they stand.

“Help me prepare for a conversation with [fake name] where I explain their work isn’t at the standard required and introduce the plan. Say I’d like to hear their opinion and get their commitment to improving in line with what is expected of them and what I believe they have the potential to achieve. Outline the structure of a productive discussion, that I can follow in a [number of minutes] meeting. Include time for their questions and pre-empt concerns or questions they might have. The tone should be authoritative but not harsh, to avoid them becoming defensive.”

Get Help With HR: ChatGPT Prompts To Improve A Team Member’s Performance

You didn’t start a business to carry people. For maximum chance of success, you need winners on your team. If someone is falling short they need to know so they can rectify their behaviour and get up to speed. Check your facts to be sure of your case then define the standards you expect in your company. Hit the standards with your actions as a leader, prevent issues escalating in the first place, and get ready to bring your concerns up with the team member in question. Draft a performance improvement plan that sets them up for success then schedule the chat and lead it with confidence. Don’t sit in silence and let underperforming team members dictate your company’s future. Get intentional about making a change.

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Tesla asks shareholders to restore $56B Elon Musk pay package that was voided by Delaware judge

FILE - Tesla CEO Elon Musk leaves the Tesla Gigafactory for electric cars after a visit in Gruenheide near Berlin, Germany, on March 13, 2024. Elon Musk will ask Tesla shareholders to reinstate the compensation package that was rejected by a judge in Delaware this year and to move the electric carmaker’s corporate home from Delaware to Texas. (AP Photo/Ebrahim Noroozi, File)

FILE - An 2023 Model X sits outside a Tesla dealership on June 18, 2023, in Englewood, Colo. After reporting dismal first-quarter sales, Tesla is planning to lay off about a tenth of its workforce as it tries to cut costs, multiple media outlets reported Monday. (AP Photo/David Zalubowski, File)

FILE - Tesla CEO Elon Musk waves as he leaves the Tesla Gigafactory for electric cars after a visit in Gruenheide near Berlin, Germany, March 13, 2024. After reporting dismal first-quarter sales, Tesla is planning to lay off about a tenth of its workforce as it tries to cut costs, multiple media outlets reported Monday. (AP Photo/Ebrahim Noroozi, File)

FILE - A Tesla logo has rain drops on it Feb. 27, 2024, in Charlotte, N.C. After reporting dismal first-quarter sales, Tesla is planning to lay off about a tenth of its workforce as it tries to cut costs, multiple media outlets reported Monday. (AP Photo/Chris Carlson)

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DETROIT (AP) — Tesla is asking shareholders to restore a $56 billion pay package for CEO Elon Musk that was rejected by a Delaware judge this year , and to shift the company’s corporate home to Texas.

The changes, to be voted on by stockholders at a June 13 annual meeting, could be a tougher sell than when it was first approved in 2018. The Austin, Texas, electric vehicle maker is struggling with falling global sales, slowing electric vehicle demand, an aging model lineup and a stock price that has tumbled 37% so far this year.

In January, Chancellor Kathaleen St. Jude McCormick ruled that Musk is not entitled to the landmark stock compensation that was to be granted over 10 years.

Ruling on a lawsuit from a shareholder, she voided the pay package, saying that Musk essentially controlled the board, making the process of enacting the compensation unfair to stakeholders. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf,” she wrote in her ruling.

But in a letter to shareholders released in a regulatory filing on Wednesday, Chairperson Robyn Denholm said that Musk has delivered on the growth it was looking for at the automaker, with Tesla meeting all of the stock value and operational targets in the 2018 package that was approved by shareholders. Shares are up 571% since the pay package began.

“Because the Delaware Court second-guessed your decision, Elon has not been paid for any of his work for Tesla for the past six years that has helped to generate significant growth and stockholder value,” Denholm wrote. “That strikes us — and the many stockholders from whom we already have heard — as fundamentally unfair, and inconsistent with the will of the stockholders who voted for it.”

In the filing, Tesla said it intends to appeal the decision. If shareholders approve the new package, disclosure and procedural deficiencies and breaches of the board’s fiduciary duty detailed by McCormick should be fixed, the filing said.

But Tesla said shareholders may still challenge the ratification vote. Even if it does pass, Tesla said it may not fully resolve the matter and a Delaware court could find the ratification itself is not fair to shareholders.

If shareholders don’t ratify the plan, Tesla said it may need to negotiate a replacement with Musk. That may take a lot of time and expense “in light of the criticism” detailed in the Delaware suit.

Tesla is going the route of ratification, instead of trying to negotiate a new package with Musk, which the company said would likely need to be of similar magnitude to the previous package in order to keep him.

Because it’s trying for ratification instead of a new plan, Tesla said it “did not substantively re-evaluate the amount or term” of the package and did not hire another compensation consultant to weigh in on it.

In the 2018 plan, Musk would not get salary or cash bonuses. Instead he was to receive only stock options, and only if the company met certain thresholds. It would need to grow its total market value by certain amounts, while also hitting targets for revenue and pretax earnings, and other items.

Many CEOs at big companies need to hit targets to get a lot of their possible compensation. That’s to encourage decisions that benefit the company and shareholders at large. But Musk was unusual in having all of his pay dependent on such measures.

When the company’s board drew up the compensation plan, it said it thought the hurdles would be challenging to meet. Some outsiders agreed.

But the shareholder plaintiff in the Delaware suit alleged the company’s proxy wrongly characterized all the milestones that triggered vesting in the stock options as “stretch” goals, even though internal projections indicated that three operational milestones were likely to be achieved within 18 months of the stockholder vote.

The board said it believed in 2018 that “many of Tesla’s prior successes were driven significantly by Mr. Musk’s leadership.” And it wanted to motivate Musk to “devote his time and energy” to the company when he also had interests in other companies.

Erik Gordon, a lawyer and business professor at the University of Michigan, said that since Tesla would still be a Delaware corporation at the time of the vote on the package, shareholders could still challenge it in Delaware courts.

But because Tesla disclosed facts in the proxy about the board’s ties to Musk, he would expect Tesla to win. “If the uninterested shareholders are properly informed and they vote in favor of it, the court actually has nothing to do,” Gordon said. Delaware courts, he said, “want the corporations to disclose and let the shareholders decide.”

Musk may not see much legal benefit from moving Tesla’s corporate home to Texas, because the law governing executive pay is similar to Delaware’s, Gordon said. “There’s no Texas case that tells you if this had happened in Texas you’d have gotten a different result.”

Tesla posted record deliveries of more than 1.8 million electric vehicles worldwide in 2023, but the value its shares has eroded quickly this year as EV sales soften .

The company said it delivered 386,810 vehicles from January through March, nearly 9% fewer than it sold in the same period last year. Future growth is in doubt and it may be a challenge to get shareholders to back a fat pay package in an environment where competition has increased worldwide.

The proxy statement filed with the Securities and Exchange Commission does not address Musk’s demand to own 25% of Tesla shares for him to pursue artificial intelligence and robotics at the company. At present he owns 20.5% of the company.

In January Musk challenged the Tesla board in a post on X, the social media platform he now owns, to come up with a new compensation package. Unless he gets 25%, he wrote that he’d prefer to build products outside of Tesla, apparently with another company.

Wedbush analyst Dan Ives, who is normally bullish on Tesla, said in an interview that the filing doesn’t address multiple issues including Musk’s future compensation.

“It’s the elephant in the room because Musk has threatened over X, and it’s been a massive overhang” for Tesla stock, Ives said.

Musk, he said, needs to commit to being Tesla CEO for three to five years and developing artificial intelligence with the company. When Tesla announces first-quarter earnings next week, Musk needs to spell out growth plans, including the status of the Model 2, a small EV that costs about $25,000, Ives said. Otherwise, dark days lie ahead, he said.

“There’s a feeling like the plane is crashing into the ocean and the board is focused on their own salted peanuts,” he said.

At the time of the Delaware court ruling, Musk’s package was worth more than $55.8 billion, but the stock slide has cut that to $44.9 billion at the close of trading on Friday, Tesla’s filing said.

Starting last year, Tesla has cut prices as much as $20,000 on some models. The price cuts caused used electric vehicle values to drop and clipped Tesla’s profit margins.

This week, Tesla said it was letting about 10% of its workers go , about 14,000 people.

Shares of Tesla Inc. closed down about 1% in Wednesday.

Choe and Chapman reported from New York.