Companies are operating in an increasingly competitive talent market. In order to get ahead in this market (and, in turn, entice high-performing talent), companies need to position themselves as employers of choice. And one way to do that is to show top talent that you’ll reward them for being great.
That’s paying for performance.
What is pay-for-performance?
Pay-for-performance means you’re linking performance with pay in some way.
There are a number of ways to reward performance. Think of the whole pay package as a four-tiered cake. The bottom foundational tier is company culture, benefits, strategy and other more intrinsic perks. Above that is base pay – the hourly or salary rate that shows up on your employee’s paycheck every other week. The next tier is variable pay – incentives and bonus. And the top tier is individualized recognition (both monetary or non-monetary).
You want to reward performance in each of these levels.
On the foundational level, choose to have a pay-for-performance culture. This could mean rewarding performance with flexibility (work from home or remote work), or additional perks that are contingent on performance being up to or over par.
On the base pay level, define a plan where you give bigger increases to those who perform better. On the variable pay level, set clear goals and objectives and link those with incentives that you will pay out when objectives are met or exceeded. And on the top individualized recognition level, set up a system of recognition where those who are most deserving are rewarded.
However you decide to link performance with pay, the trick is to make the connection clear and explainable. Your managers will need to talk to their employees about it at some point, so do the best you can to make that conversation easy.
Does pay-for-performance work?
Yes. Paying for performance improves employee productivity and business results. Paying for performance increases the return on your compensation investment – it aligns employee performance with your overall business objectives. Companies that do a flat, across-the-board increase annually ultimately end up reinforcing mediocrity, not excellence. Can you afford to pay for mediocrity? Can you accomplish your business goes with ok talent? The answer is no – most businesses need great talent.
And it turns out that top performers like performance-based pay. High performers want to see that their efforts are rewarded – or that the lack of effort of their peers is not rewarded.
In an NPR interview, Hidden Brain author Shankar Vedantam said, “Many of us prefer to be worse off in absolute terms so long as we’re better off in relative terms.” In other words, a strong performer would rather that a peer in the organization earn less than they earn more themselves. Pay is relative; it’s about people, and people like to feel like their efforts make a difference.
Being recognized for their accomplishments makes high-performers tick. A recent BambooHR study found that 94 per cent of employees who receive recognition daily are satisfied or very satisfied with their organizations.
A quick word of caution, though: carefully consider your culture and business goals before linking performance with pay. You can get disastrous unintended consequences if go about it in the wrong way. Take for example, the Atlanta, Georgia, school district that had a major cheating scandal when they sought to reward principals and teachers for high test scores. The goal is to boost performance, not to have your employees find a way to beat the system.
How does pay-for-performance help with recruiting?
In a competitive market, there are a lot of ways you can attract top talent. One is to pay the most, which few businesses are able to do and may not actually be as effective as you think.
A better way is to be an employer of choice. Being an employer of choice means having a good employee experience complete with culture, transparency, intentional rewards, and opportunity.
People want to feel like they can make a difference – in the company, in the industry, in the world. And employees are looking to see how their efforts translate into rewards.
And it doesn’t have to be the biggest rewards, either. A recent Payscale study confirmed that employees are more engaged by clear communication about pay than by pay itself. So you don’t necessarily have to deliver the highest rewards – it’s the clear link between the employee’s efforts and rewards that matters.
One last thought: there has been a lot of buzz in HR circles lately about removing performance ratings and revolutionizing performance management. But when you look closely, it’s more about removing a big annual process that is out of touch with the speed of business. Companies are moving to more frequent evaluation, communication, and rewards.
In other words, the link between performance and pay is still there – it’s just shifted away from base pay to the other three tiers. And when you address pay-for-performance across all the tiers, it can position you as an employer of choice, and help you win the war for talent.
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Mykkah Herner, M.A., CCP, is a compensation and human resources professional with more than ten years of HR experience. He has designed compensation strategies for over 400 organizations, poising compensation to drive business results.
See also:
7 tips for moving to a pay for performance culture
Variable pay: Is there a difference between a bonus and an incentive?
9 unique employee perks to attract talent
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