Pay-for-Performance

SUMMARY

Aside from the legal requirement to pay for work performed, a compensation program may be used to attract, retain, motivate, reward, and recognize its employees. A well-designed compensation program and performance management program will motivate employees to perform their best. Pay-for-Performance connects employee compensation, specifically base salaries and short- or long-term incentives to individual, team, or company performance.

This course presented a method for clearly rewarding performance within the guidance of the typical salary structure through the use of a pay-for-performance program.

Take Caution

Pay-for-Performance programs should be used for the appropriate workforce. The program needs to be well-designed, simple to use, and effectively communicated to ensure it is well-supported within the organization.

Administration

Pay-for-Performance programs connect all pay increases to employee performance. The goal is to correlate the position of the employee in the rate range with their relative position on a performance scale.

Result

Pay-for-Performance will result in merit increases as follows:

• Employees with strong performance and pay rates at the low end of the salary range will receive higher merit increases.
• Employees with competent performance and pay rates at the midpoint of the salary range will typically receive average merit increases.
• Employees with weak performance may receive no or a very small merit increase based on position in range.

Actual merit increase distribution should be based on the desired or actual performance distribution curve within an organization.

Performance Appraisal

Pay-for-Performance programs require that the organization has an effective performance evaluation system in place. Where possible, performance should be measured. However, this requires that there be some clear outcome that is the result of good performance in the job.

Performance appraisal is the most common form of performance evaluation. Methods of appraisal involve comparing the employee's performance to some standard:

• some form of rating scale (5-tier rating scale most widely used)
• standard of performance
• goals and objectives
• other employees' performance

No one method can be said to be best for any organization or type of job, and each method has advantages and disadvantages. Attention to performance appraisal management, feedback, training, and communication is necessary if employees and managers are to view the pay-for-performance program as a fair and reasonable way to allocate increases. This will increase the success of the organization’s pay-for-performance plan.