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March, 2018

Does Performance-Based Pay Make Sense For Your Company?

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Does Performance-Based Pay Make Sense For Your Company?

The concept of performance-based pay is one most of us can easily identify with. We grew up participating in spelling bees, playing competitive sports, and challenging our peers - there was always a winner. We carried this philosophy into other areas of our lives, pursuing achievements in school and later in our professional careers. It has been instilled in us that those who work the hardest and perform the best receive recognition and reward.

Seems pretty black and white, right? The problem is, however, that performance-based compensation isn’t so cut and dry as giving a trophy to the winner of a foot race. Because in this instance, the highest achiever is awarded money for his or her efforts. So with much more on the line, we want to give you everything you should first consider before deciding whether or not your business should implement a merit-based pay system.

What is Performance-Based Pay?

Just as the name entails, performance-based compensation is the process of paying employees for a specific outcome or paying extra for work that goes above and beyond the normal call of duty. With this strategy, companies can potentially see great benefits, but there can also be significant drawbacks. And unfortunately, a performance-based pay system is not as straightforward as its name implies.


The Benefits

Recognizing those who are delivering the highest results to your company yields many positive outcomes. It goes without saying that employees appreciate and value when their work is appreciated and valued, but sometimes words of affirmation and encouragement only go so far. Instead, offering monetary recognition can result in higher rewards for your top performers and organization as a whole.


Identify Areas For Improvement: By implementing a merit-based pay strategy, your company can easily identify those highest-performing employees and those who may not be contributing as much to the company. Putting a quantifiable amount on an employee’s contributions can make clearer the reasons for poor or outstanding performance. Whether it be an ineffective training process, lack of accountability, or miscommunication from superiors, implementing performance-based pay can help you identify areas in which your business can improve. Being able to differentiate between the tiers of employees by offering different monetary values shines a light on those areas that do need improving and managers can strategize change from there.


Increase Retention: Merit-based pay, as we mentioned, helps employers differentiate between top and low performing employees. When top performers are paid a higher compensation rate and are recognized for their performance, they are more inclined to remain with their organization. This payment method encourages those who are more valuable contributors to continue their best work because they will be fairly compensated for it.

Better Recruiting: When companies can identify those employees who perform better, they can use that knowledge to improve their recruiting processes. Instead of vetting and hiring employees who might not contribute to the organization, they can use their experiences with top performers to hire candidates with similar attributes, goals, and personalities. This assessment can save companies time and money by hiring top candidates from the start.
The Drawbacks

The Drawbacks

While there are many benefits to this form of compensation once the weaknesses are identified, including increased employee retention, better recruiting, and higher performance, there are also major drawbacks to consider.

A Blurred Line: Unfortunately, it’s extremely challenging to accurately and proportionally pay employees using this system. There is oftentimes a blurred line as to what is expected to receive a certain level of compensation. If clear compensation and performance metrics are not outlined, there could be confusion and miscommunication regarding what is expected to reach compensation goals. This can lead to disgruntled and discouraged employees who are not receiving the pay they expected. Additionally, a blanket policy that encompasses all working departments of your organization is likely an inadequate one since work greatly differs company-wide.


Misalignment of Goals: For those employees who are top performers and see increased compensation from this, there is the possibility they could eventually reach a cap on their possible earnings. When motivated solely by the extra incentive to receive a higher wage, this could potentially become their only focus - forgetting about the goals of your organization. In this situation, company missions, goals, and culture might be negatively affected by those whose contributions truly impact results.


Threat of Dissolving Profits: Sometimes, companies can use performance-based compensation as a temporary stitch to fix a performance hole without fully understanding the ensuing issues that could result. This payment method is one that requires thorough research to evaluate the appropriate pay that should be rewarded for certain levels of compensation. Often, the allure of increased pay incentivizes higher performance - which is all good and well - but companies may lack a plan for when the cost begins to outweigh the benefits. Realistically, offering this type of pay is not always sustainable long-term, and profits begin to take a hit.

The Bottom Line

The Bottom Line

Performance-based compensation is a tricky method to pay your employees. For some companies, it might be beneficial, but for others, the costs might outweigh those benefits. Understanding your company’s compensation structure, employee hierarchy, and future goals are essential when determining if it’s right for you.

If performance-based pay is the next step for your company, be sure to have clearly communicated the expectations to your workers and analyzed the potential costs. Make sure there are performance measurements in place to track the goals you’ve set for your individual workers and organization to ensure an effective, smooth compensation program.

How APS can help

APS provides cloud-based solutions for Core HR and Payroll processes. With APS’s online platform, managers can electronically assign and track employee performance, achievements, and assign goals to simplify performance management and maintain accountability among employees. By using this tool, organizations can eliminate miscommunication, foster company-wide and individual visibility, and promote growth.

For more information, please visit www.apspayroll.comor call 855-945-7921.

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