Pay-for-Performance Systems are a Popular Compensation Plan

I think the best way to define pay-for-performance is that an employee’s salary increase is directly tied to his/her success in accomplishing a certain set of goals that are established and agreed upon between the manager and the employee. 

Many people confuse pay-for-performance with incentive pay. It’s challenging because there are aspects of pay-for-performance that are incentive pay. 

If you look at how compensation plans were designed many years ago, they used to be just a basic merit system. And then the merit would be reviewed once a year and the manager would look at the market and see what people were making in other sectors. Then the company would start spreading the money like peanut butter. 

Eventually it was decided in the compensation world to include some kind of additional salary along with base pay, which was called incentive pay. 

A lot of companies still use this combination, and the incentive pays are directly tied to the overall company goals. 

Now some companies are really moving toward a true pay-for-performance system, and have actually set dollars aside to pay employees for the goals they accomplish—individual goals, not just company goals. 

True pay-for-performance systems are challenging to manage—but it can be done. The upside overpowers the downside because, if you’re really working with a true pay-for-performance system, and your company is doing well, your employees will typically make more and will also be a lot more productive. 

Common Mistakes

• One mistake companies tend to make is they fail to really get clear measurements for the defined goals. Measurements are necessary so both the employee and the supervisor/manager know when the goal has been reached. 
• Another mistake that companies make is failing to revisit the goals throughout the year. Business changes and you may need to tweak an employee’s goals every now and then to fit the needs of your business. You have to keep your eye on the mark. 
• Another mistake is asking your employees to write their own performance evaluation at the end of the year. There’s nothing wrong with self-evaluations, but supervisors need to also write a performance evaluation for each employee.
  
  The downside to only using your employee’s evaluation, and not adding to it with your own observations and comments, could be that an employee is earning more money than he/she should be. 
• One final mistake is companies not having good supervisors that are adequately trained to use the pay-for-performance system. Companies tend to assume just because the person is a manager or supervisor that he/she knows how to effectively use the pay-for-performance system. That is not always the case. 

These are some of the biggest mistakes I see companies make. 

Before you move your company to a pay-for-performance system (or any type of compensation system), you need to understand what your goals are and what you’re trying to motivate employees to do. 

For example, are you trying to get people to join your organization? Are you trying to retain employees? Or are you just trying to get your employees to perform at their highest possible level? 

Once you determine how you want to use your pay-for-performance system, you’ll be in a much better position to use it effectively. 

In my next Insight, I’ll give you an example of a time I helped a company with its pay-for-performance system, as well as give you steps to take if you want to implement one in your company.

Once you determine how you want to use your pay-for-performance system, you’ll be in a much better position to use it effectively.