Pay for performance can be an effective reward strategy to encourage high performance from employees. It’s a financial incentive that allows employees to earn more when they hit certain benchmarks and meet performance goals. According to the 3R Strategy Salary Planning Report, pay for performance is most common among organizations in the financial services, manufacturing, media arts and energy/utilities sectors.
However, so often we see leaders getting it wrong, whether that be through a lack of transparency, perceived unfairness or poor recognition. And employers cannot simply rely on monetary incentivizes alone to encourage high performance from employees. If their people do not feel aligned to the company or their purpose at work, or do not feel that they have a strong, constructive relationship with management, then financial rewards can lose their meaning and impact.
Let’s examine four key tips to effectively implementing a pay for performance structure within your organization.
- Be transparent.
When we see financial incentives failing in organizations, often it’s because leaders haven’t been clear about how they define high performance. A lack of transparency can make it be perceived as unfair.
Several factors must culminate to make pay for performance structures work. Research from McKinsey & Company indicate that the procedure, (i.e., the process of how people are treated and perception of fairness) is much more important than the outcome of pay and reward.
It helps to think of your bonus pot as a pie that will be divided among your employees. If you give one person a bigger piece of the pie, someone else will receive a smaller piece. If people cannot clearly see the rationale for this decision, they may resent it or feel there has been favoritism.
A culture of trust and collaboration must be built to avoid employees feeling like they’re always competing for a bigger slice of the pie. It should be a fair process where desired employee outcomes and behaviors are clearly defined and the pay for performance structure is clearly understood by everyone in the company. This can help maximize long-term engagement and commitment. The key is to be transparent about who the top performers are and why managers see them as such. This can give everyone a fair advantage to becoming top performers and getting a chance at a bigger slice of the pie.
- Align with a wider purpose.
The objective of pay for performance should be to engage employees by aligning the organization’s sense of purpose with the employees’ purpose and desire to help the organization achieve that purpose.
Purpose goes beyond making a profit for the company. In recent years, we’ve seen many large organizations move away from using only financial measures as incentive to perform to much wider metrics, such as environmental, social and governance (ESG). Establishing a sense of purpose and community can also incentivize better performance.
This is partly influenced by employee preference to work for organizations that have a clear sense of purpose and demonstrate corporate responsibility, which is even stronger in Gen Z employees. Creating deeper employee engagement requires purpose and meaning to be laid out clearly alongside financial reward.
- Offer recognition.
While financial reward is an important incentive, as it can make a tangible difference to an employee’s life, we all have a human need to feel valued and appreciated for our efforts. A big win or sustained high performance deserves recognition beyond a monetary incentive, whether that be a positive chat with a manager or an award. Recognition of achievements and clear appreciation is key to boosting employee engagement and encouraging continued high-level performance.
In addition to formal recognition programs, those everyday one-on-one conversations can make a real difference to employees and as a result, should be incorporated into the organizational culture as standard practice.
- Ensure financial recognition is effective.
Lastly, it’s important to allocate your reward budget in a way that provides value to employees. If employees are receiving a bonus for “exceptional” performance that feels very small, they may feel demotivated rather than rewarded. This can poorly affect their work performance and how motivated they feel to contribute toward business success.
For instance, if your organization can only allocate a small amount of money to the recognition budget, using this to give employees pay raises may result in a barely noticeable pay increase. Instead, you can use the same budget to buy a thoughtful, more personable gift (e.g., a team outing or a gift card to a five-star restaurant) that holds more meaning than a small increase in their bank account each month.
Dedicating the time to ensure recognition has value is crucial for engagement and performance management.
Taking these steps to build trust in the performance management and recognition process can have a significant impact on the efficaciousness of your pay for performance structure. By building a culture of trust through transparency and understanding of rewards, as well as fairness and sufficient recognition, employees are far more likely to be incentivized to achieve sustained high performance and be engaged with the organization.