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Employee Engagement Performance Management

12 Pros and Cons of Pay-for-Performance Compensation

April 26, 2021
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6 min read
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This article discussing the pay-for-performance compensation model and the benefits and drawbacks of this strategy was originally published in May 2015. All relevant copy and statistics have been updated as of April 2021.

In today’s competitive talent market, employers need to find ways to engage their employees and capitalize on competitive advantages to attract and retain A Players. One area where organizations can customize and personalize their strategies is in their compensation model for employees. Employees want to work for an organization that values the effort they put in, and employers want to find a strategy that attracts talent without breaking the bank.

One compensation strategy that has been discussed in the HR space is the pay-for-performance model. Join us as we dive deeper into what this compensation strategy is and the impact of implementing it in your organization.

Is #PayForPerformance the right #compensation strategy for your organization? @ClearCompany breaks down the benefits and drawbacks of implementing this payment model:

What Is the Pay-for-Performance Model?

Pay-for-performance, also known as performance-related pay, refers to a compensation program where employees are paid based on their performance. It’s a tempting model because it promises maximum pay for minimum investment. Employees start with lower base salaries and receive discretionary or non-discretionary bonuses based on their performance. This scale allows employees to take charge of their compensation, offering the ability to increase their pay if their performance improves. 

In theory, the pay-for-performance plan seems strong, but there are some crucial factors that HR professionals need to consider before adopting this payment structure. We’ve compiled 12 pros and cons of the pay-for-performance model to help you decide what’s right for your employees. 

Bonus Material: Need some help motivating your remote employees? Look no further! We’ve got 4 strategies for you to engage and connect with your remote staff.

Six Pros of a Pay-for-Performance Model

Organizations implement a pay-for-performance compensation model because of the potential benefits to employees and the business:

  1. Pay-for-performance can motivate people to join and stay with the organization.
  2. It can motivate employees to perform at the top of their skill set.
  3. A mix of fixed base salary and fluctuating bonuses results in variable pay that can help businesses pay employees more without impacting revenue.
  4. Incentivizing high performance can keep employees engaged and productive.
  5. It increases transparency around pay, making it clear how employees can earn raises.
  6. Pay-for-performance makes it easy to identify top-performing employees and give promotions.

Six Cons of a Pay-for-Performance Model

There are also some cons of adopting a pay-for-performance strategy:

  1. Consistently, researchers find that organizations need to implement additional incentives alongside the pay-for-performance model to motivate employees to perform at their best.
  2. The quantity of work may become more important than the quality, causing overall work quality to decline. 
  3. Pay-for-performance doesn’t motivate everyone — for some team members, it can lead to increased stress and lower morale. 
  4. If employees become too focused on improving their own performance, they may be less inclined to help out their colleagues, which can negatively impact teamwork.
  5. Managers review employees, which may result in some subjectivity when it comes to determining compensation increases.
  6. If you make the switch to a pay-for-performance plan, employees will adjust to the benefits and you’ll attract and retain employees who thrive on the model. As a result, making changes to your compensation plan in the future could affect employee retention."The fundamental problem with pay-to-performance models is that they put all the emphasis on achieving a goal set out by an employer for the sole sake of gaining the reward. But really, to have truly happy employees, it has to be about more than that. A happy, creative employee ultimately isn’t motivated to do their job well because of a perk they might receive. They do their job well because they take pride in it and want to do a great job."
    - Paul Petrone, Communications Director at VoiceGlance

Alternatives to Pay-for-Performance

In recent studies, researchers sought answers as to whether compensation is a successful motivator for producing higher quality work. The results found that, in order to motivate employees to perform both high-quality and efficient work, your program needs to lean on additional influencing factors. That means if you choose to lean on a pay-for-performance model, you’ll likely need to find new ways to motivate employees like goal setting and learning and development initiatives. 

Luckily, finding ways to motivate your team isn’t tricky or costly. 80% of employees say that they are more motivated when their efforts and work are recognized and appreciated. Simply saying “Thank You” or “Great Work” can go a long way and have a more positive long-term impact. Employees want to know their work matters, and if a boss acknowledges what they did to directly help the company, they’re going to work better.

@ClearCompany says employers need to find unique ways of #motivating their employees that lie outside of pay. See why the #PayForPerformance model falls short in engaging your team:

In that same vein, employees crave a workplace that showcases its commitment to developing and advancing their careers. Offering employees an opportunity to expand their professional skillset and grow within the company will reduce turnover and retain your A Players. Leaders will see added benefits to developing their existing workforce, with employees becoming more resilient and operations running more smoothly.

"You have to find a growth path for the great ones. The great ones will join your company to grow, learn, to do new things. If they can't grow, they die a little every day. It's your job to understand the career path of all your key employees. And do whatever you can, within the boundaries of reality, to help them achieve it."
- Jason Lemkin, Managing Director at Storm Ventures

This doesn’t mean you don’t need to keep your compensation packages attractive and at the forefront of your mind. It also doesn’t mean that some compensation based on performance management is a bad idea. But stay smart about what your ultimate goals are for the workforce.

Bonus Material: Make sure you tackle performance management the right way this year. Check out the trends that HR professionals should be keeping an eye on.

Create Your Own Strategy

Some organizations see significant returns on their pay-for-performance plan. This could be due to a company culture where the model thrives or because the company is large enough to adequately match compensation to creative work. However, HR professionals need to remember that just because a model works for one company doesn’t mean it will work for another. 

As you evaluate your current compensation model and determine ways to motivate your employees, remember to touch base with your team and see what parts of your program they do and do not enjoy. If you want your employees to work harder and stay with your organization, you need to provide them with a workplace experience that is enjoyable and structured fairly.

For nearly two decades, ClearCompany has helped organizations engage, motivate, and retain their top talent. With a history of proven success, our Performance Management Platform provides HR professionals with the tools and resources they need to evaluate performance fairly, give regular feedback and reviews, and motivate employees to do their best work. 

For more information on how we can help you reach your workplace goals, reach out to a ClearCompany expert and sign up for your free demo of our Performance and Engagement solutions.

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