Pay For Performance Model: An Important Overview In 2021

Introduction

The pay for performance model is innovative and used by organizations depending on their goals, budget, size of company etc. Essentially the pay model serves to motivate employees to perform better and get paid higher.

1. What is Pay for Performance?
2. Is Pay For Performance Really Working?
3. Pros and Cons of a Pay For Performance Model
4. Implementing an Effective Pay-for-Performance Model
5. Best Practices in Linking Performance to Rewards
6. The Benefit of Linking Pay to Performance 

1. What is Pay for Performance?

The model of pay for performance is used with compensating employee salaries and is a mature and complex model driving talent retention and boosting employee engagement as compared to the systematic entitlements model. It has several forms that are discussed below.

• Increase in Merit Pay: This model is the most popular and is based on an increase in the performance based pay of an employee for high performance delivered annually. It is reflected in the budget process and as an annual increase in the salary for meritorious performance.

• Variable Pay Programs: This model has an increase in the non-discretionary and discretionary bonuses for the payout period (quarterly, half-yearly etc.) and is pay for performance plans based on the measurement of performance metrics, employee eligibility, etc.  

Some such variable examples of pay for performance plans and pay programs are  

• Discretionary Bonuses are given to employees for outstanding performances and include pay for performance model retention bonuses to long-tenured employees, spot bonuses as special recognition for services, project bonuses for timely and superior project completions etc.
• Non-discretionary bonuses aligned with company goals offered to teams, employees etc., on achieving pre-set goals for the assessment period. They could be team-incentive bonuses, company-wide bonuses, or individual incentive bonuses. 

2. 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. But only a few organizations have succeeded in exploiting the usefulness of an effective compensation plan and having a competitive pay for performance model in place.

3. Pros and Cons of a Pay For Performance Model

Though the concept of pay for performance is attractive and favours many companies, it is still not achieving and driving performances in groups or individuals to its fullest potential. The reports from a survey conducted by Willis Tower Watson’s Talent Management and Rewards Pulse reaffirmed this. 

• About one third stated the method of pay for performance compensation helped in differentiating pay hinging on the individual’s extraordinary performance. 
• Only one-fifth of the North American companies were successful in driving better individual performances using this pay for performance schemes method in their organization. 
• Half of them agreed that annual incentives in the pay for performance systems were unable to motivate employee performance based on the differentiating pay method.  

The survey also noted that employees were not clear on the types of pay for performance plans, measurement of merit and did not see eye-to-eye with their employer’s merit-influencing values. Two-thirds of the employees felt the managers were using factors like skill and knowledge in their current role as indices for decisions related to pay. A little less than half felt the performance indices were not taken into consideration at all for differential pay.

The tools and benefits of pay for performance models are great for reward and recognition programs, driving employee performance and more especially when they are well-designed and implemented well.  More so, when performance can be an ambiguous goal and when company goals are not aligned with the right performances. Hence a lot of effort and thought is required to ensure that performance is properly defined, and managers are driving the right performances aligned with company goals.

4. Implementing an Effective Pay-for-Performance Model

Implementing such effective pay for performance models can use several tricks and best practices to succeed. Since employee performances are either qualitative (Ex: customer satisfaction, sales, employee productivity, engagement etc.) or quantitative (Ex: accounts, programming, administration etc.), it is easy to develop a flexible model that can quantify performance and link such performance to recognition through rewards in a manner suitable to company goals. 

5. Best Practices in Linking Performance to Rewards

• Identify the performer’s triggers and reward suitably: Top performers may not be motivated by bonuses or higher pay packets alone. Hence the trigger points driving production and employee engagement need to be identified and used in the rewards programs to exploit the pay for performance advantages and disadvantages.

• Employee objectives aligning: Sine the perception of the performance itself may be different from the standpoint of the employer or employee, there is a need to identify the employee objectives and align these with the rewards model. If the employees see their objectives met and are assured that they are working towards the same goals, the model’s performances are bound to be more measurable and cohesive in nature.

6. The Benefit of Linking Pay to Performance 

While the objective of rewarding employee performances with a pay for performance model is laudable, it is best to ensure that the structure and performance themselves are aligned to meet the departmental and organizational goals. Consistent and fair policies on measuring performances and compensating excellent performances are the crux of the matter. Tools from the SpriggHR’s Compensation kit should help in reporting, tracking the activities that are to be compensated and provide a linkage to the pay-for-performance model. A consistent approach means linking the employee performance to the bonus allotted and making adjustments regularly based on performance monitoring.

Conclusion

The pay for performance model rewards the performers and drives employees to stay motivated and perform better. There are various models available that can be aligned to suit organizations. However, it is critical to follow best practices and a performance-measuring model for apportioning benefits aligned to both employer and employee goals.

Are you interested in learning more about Analytics in Workforce Management? Take a look at our People Analytics and Digital HR program, in collaboration with IIM Indore. This is a 3-month long program with instructor-led sessions by IIM-I faculty.

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