How Pay-for-Performance Can Help Small Businesses Compete

Here is an HR term—that is exactly as it sounds!

Pay-for-performance: While not the answer for all personnel-related compensation challenges, it is a straight-forward term. You want your compensation strategy to support your organizational goals.

Pay-for-performance connects compensation to individual job or work performance. When used in appropriate situations, it can do a lot to increase worker performance. As employers look to maximize their pay budgets, they look for ways to reward top performers. Top performers help ensure company successes, and they also serve as role models for other employees.

Why do businesses implement a pay-for-performance compensation program? Simply put: This program allows for three competitive advantages:

1. It serves to attract, recruit and retain high achievers

2. It serves to motivate and reward high achievers

3. It serves to tie salary adjustments to performance goals (which also, coincidentally, helps to minimize potential legal issues, as performance rating requirements are objective rather than subjective.)

A Real-World Example

To help you understand, I’ll share a recent professional experience. I am working with an organization to implement a pay-for-performance program, which is an involved process but should pay off for them in the long term.

This organization is at a crossroads. They are experiencing high turnover in a field where highly trained, sophisticated individuals are in strong demand. To remain competitive, they acknowledge that they have to do something to attract and keep the valuable employees they have now.

We determined that a pay-for-performance program will help them reduce increasingly expensive, high-turnover rates and will also serve to increase the level of employee satisfaction. This type of compensation program sends a message that high-performing employees are valued by aligning performance with compensation.

In spearheading this initiative, these are the steps we are taking to launch a consistent, clear and process-oriented program:

1. Updating job descriptions and setting realistic job expectations for employees.

2. Creating goals whereby the employees "go above and beyond" the basic expectations; corresponding pay increases are also established.

3. Communicating and clarifying expectations, goals and pay.

4. Allowing for employee input to gain employee buy-in.

5. Reviewing and refining goals to make sure they are SMART (smart, specific, measurable, attainable, realistic and time-bound).

6. Reviewing, integrating and transferring the performance appraisal process into a formal performance-appraisal document.

7. Developing a matrix by which the rating scale corresponds to goals, expectations and the "going above and beyond" criteria.

8. Calculating and defining how the ratings turn into dollars. For instance, how does one particular rating turn into a dollar percentage amount?

Finally, as time goes on, we tweak the process and constantly monitor and audit the program so that necessary adjustments can be made.

In today’s global and competitive economy, pay programs cannot operate in a vacuum.

Most everyone realizes that businesses cannot succeed by "yesterday’s standards." A generation ago, employees stayed with a company forever and they usually expected and received automatic pay increases. The business environment is not like that anymore; and the younger generation expects more than an automatic three percent increase in salary to keep them motivated.

Pay-for-performance connects compensation to individual job or work performance. When used appropriately, it can do a lot to increase worker performance.