Pay for performance plans are a pay strategy where evaluations of individual and/or organizational performance have significant influence on the amount of pay increases or bonuses given to each employee. When properly designed, pay for performance plans can be effective in aligning employee’s behavior with company goals and therefore benefit both the employees and the business. Proponents of pay for performance plans believe they help attract and retain better employees and motivate improved performance.
Pay for performance plans move away from the entitlement mentality of annual increases and can motivate employees to work harder and smarter toward achievement of specific team, department and company goals and allow employees the opportunity to attain increased levels of compensation. An effective pay for performance (P4P) plan must link pay to performance. The percentage of an employee’s salary that is based on performance can vary greatly and is an important consideration when designing a (P4P) plan. Pay alone is not an effective motivator and is best when combined with other performance tools such as feedback, evaluations and increased management support.
Performance evaluation serves as the foundation of a pay for performance system. Performance Appraisals must address core competencies that have a proven impact on the business. P4P plan performance review measures may be different for different positions. Effective performance metrics can be obtained by surveying job responsibilities of current staff in various positions. Performance evaluations should be conducted in frequent intervals so that behaviors can be addressed and altered when they occur. When holding P4P performance reviews that determine compensation awards, performance measures must be consistent and accurate. Effective and fair supervisors who are properly trained and a system of checks and balances to ensure fairness will be essential.
Implementing a P4P plan requires major organizational change and can have serious challenges. The advantages can be increased employee motivation and incentive toward generating revenue and improving overall company success. Also all business units work more in tandem and therefore reduce or eliminate conflicting departmental agendas. P4P plans are complex and may take more than a year in development to ensure effective and appropriate performance outcomes with performance appraisal processes that are strategic and objective. P4P plans require sufficient funding to ensure that sufficient rewards go to top performers. There are often payroll complexities resulting from performance measures and outcomes that vary for every role and for every department. There can also be legal issues such as ensuring compliance with overtime pay requirements under the FLSA as well as real or perceived employee bias and discrimination. Base salaries are typically lower than average and since rewards are based on company performance, there will be lean times when the rewards are minimal to none. This however, will be balanced in good times when rewards can be as much as 40-50%.
P4P plans require a substantial investment of time, money, and effort. If you are considering a pay for performance plan, here are some key decision points:
- Does your organization culture support a pay for performance plan?
- Is Management committed to changing the culture?
- What are the goals and objectives you hope to achieve?
- Which employee groups should be included in the P4P plan?
- Do you want rewards to be based on individual, team and/or organizational achievements? And should awards be short term and/or long term?
- Will rewards be lump sum or add to base salary?
- How much pay should be contingent upon performance?
- How will the performance pay be funded?
- Who will make the pay decisions?
- Who will provide input on the performance ratings?
- Will you have sufficient training support and resources to support the P4P plan?
Change can be challenging and demanding. At WageWatch our compensation consultants can assist with your organization’s compensation needs and help you ensure that your compensation programs are supporting your company’s business strategy and objectives. WageWatch also offers accurate, up-to-date benefit survey data, market compensation data and salary surveys that will allow you to stay current with the times. This information is highly beneficial in creating the best salary and benefits packages that meet or rival the industry standards. For more information on our services, including consulting, salary survey data, benefit survey data and market compensation reports, please call WageWatch at 888-330-9243 or contact us online.