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Pay-for-Performance Strategies

2 November, 2015 - 09:56

"Compensation and Benefits", we discussed several pay-for-performance strategies we can implement to motivate our employees. A pay-for-performance strategy means that employees are rewarded for meeting preset objectives within the organization. For example, in a merit-based pay system, the employee is rewarded for meeting or exceeding performance during a given time period. Rather than a set pay increase every year, the increase is based on performance. Some organizations offer bonuses to employees for meeting objectives, while some organizations offer team incentive pay if a team achieves a specific, predetermined outcome. For example, each player on the winning team of the 2010 NFL Super Bowl earned a team bonus of $83,000,  1 while the losing team of the Super Bowl took home $42,000. Players also earn money for each wild card game and payoff game. Some organizations also offer profit sharing, which is tied to a company’s overall performance. Gain sharing, different from profit sharing, focuses on improvement of productivity within the organization. For example, the city of Loveland in Colorado implemented a gain-sharing program that defined three criteria that needed to be met for employees to be given extra compensation. The city revenues had to exceed expenses, expenses had to be equal to or less than the previous year’s expenses, and a citizen satisfaction survey had to meet minimum requirements.

To make sure a pay-for-performance system works, the organization needs to ensure the following:

  • Standards are specific and measureable.
  • The system is applied fairly to all employees.
  • The system is communicated clearly to employees.
  • The best work from everyone in the organization is encouraged.
  • Rewards are given to performers versus nonperformers.
  • The system is updated as the business climate changes.
  • There are substantial rewards for high performers.

As we have already addressed, pay isn’t everything, but it certainly can be an important part of the employee retention plan and strategy.