Pay-for-performance is fast becoming the new normal. We are seeing it in use by more and more companies to get the most out of the reduced compensation budgets we’ve had in recent years.
“Everything in our daily lives is more performance-based than it ever has been in the past. In many professions, performance pay has become commonplace, where years ago it was almost unheard of.” Dan Walter told us in a recent BLR webinar. “Pay for performance continues to move forward because it has to—it is the next evolutionary step.”
Even so, many HR teams and compensation managers are reluctant to embrace pay-for-performance, either assuming it doesn’t work or it will be too cumbersome to effectively manage. Here are 5 reasons to embrace the pay-for-performance trend.
5 Reasons to Embrace Pay-For-Performance
- It links compensation to business strategy and culture. Organizations need to have their compensation program drive the organization to achieve its goals.
- It’s easier to align payouts with actual contribution and success when you use pay-for-performance. In pay-for-performance, the link between employee contribution (performance) and success (pay) is straightforward. Regular or irregular increases based on the more subjective idea of merit, on the other hand, don’t always have an easy, obvious link—and as such, they may not work as well to incentivize future performance.
- It retains and engages high performers. Creating the link between performance and pay gives high achievers another goal to work toward or hurdle to cross. This can serve as an additional motivator.
- It can be used as a competitive advantage. A lot of companies don’t think of it this way, but pay-for-performance systems can be used to incentivize new high-potential hires to come to your organization—and, once there, to live up to their potential.
- Like it or not, it’s the new normal. And since this is the new normal, we might as well do it right. Many companies jump on the bandwagon without doing the hard work up front to get the system implemented in the way it will be most beneficial and effective.
For more information on pay-for-performance systems, order the webinar recording of “Pay for Performance: Best Practices for Embracing the New Normal in Compensation Design.” To register for a future webinar, visit http://store.blr.com/events/webinars.
Dan Walter, CEP, is the founder of Performensation Consulting. Dan has more than 18 years of experience in with equity compensation programs. He has designed and administrated both management and broad-based programs, for both public and private companies.