October 13, 2021 
When running any kind of business, you need to be mindful of how you keep your employees engaged. After all, they remain your most important asset.
Whilst there are plenty of things you can implement to keep employees motivated, one strategy that many employers are turning to is implementing comprehensive performance plans.
This involves managers & leaders coming together with their teams to design targets that employees are held accountable to. These targets have accompanying metrics that enable employees and managers to track performance. Metrics can be financial indicators or indirect indicators such as customer satisfaction or project speed.
For performance plans to be effective, targets need to be matched with financial incentives. These would vary depending on an individual’s performance, which is where the concept “pay-for-performance” comes in.
What is pay for performance?
Pay for performance is a compensation strategy that uses salary, bonuses, stock options as well as other benefits to directly incentivise employee performance.
In fact, the term “pay-for-performance” refers to performance-based pay programs where an employee is incentivised and/or rewarded for achieving their goals and objectives.
Over the years, pay-for-performance plans have become extremely popular, with 75% of organisations currently leveraging performance compensation as part of their overall compensation plans.
Pay-for-performance can vary depending on your organisation’s budget, compensation philosophy, and goals. When designing a pay-for-performance plan, you’ll first want to consider what you want to achieve, the frequency in which you’ll reward employees and the budget to fund the program.
What are the underlying principles of performance pay?
The underlying principle for all performance pay schemes is that the reward increases work effort and results in higher organisational performance and employee retention.
Thus ensuring that employees will be motivated to work harder and smarter to increase output.
What is the benefit of a performance plan?
Pay-for-performance is a compelling way to create a productivity-oriented culture in any organisation. Whilst it can initially be time-consuming for a company to search and design suitable incentives plans, the positives shouldn’t be neglected.
In fact, there are many advantages to pay for performance and incentives plans for both employers and employees including:
Performance plans incentivise employees to remain engaged.
It’s easy (and quite common) these days for employees to feel like a cog in a machine at their place of employment. This results in employees who are less engaged and less inspired by their salary alone.
Pay-for-performance motivates employees to work above the expected standard to earn the extra compensation. Therefore, when employees are compensated based on their performance, they are more likely to work effectively to increase their income.
In other words, the opportunity for employees to earn their desired income can stimulate them to go above and beyond on each of their tasks.
When your employees are more engaged, they’re also more productive, which can improve your company’s profit to hit revenue goals.
Performance plans help establish company culture and values.
Having a distinctive company culture will improve your business in many ways. Having a building full of motivated, competitive employees is great for morale as a whole.
When establishing company goals for employees to achieve, align them with your company’s overall objectives. Doing this gives your employees a better understanding of their role in the organisation and why it matters.
Aligning incentives with company values also helps to reinforce positive behaviours you want your employees to have.
When employees receive rewards for demonstrating those behaviours, it promotes continued use and will create a more positive and cohesive company culture.
Performance plans increase productivity.
Pay-for-performance aligns employee compensation with their contributions at work. This means that increased productivity comes with rewards or bonuses.
In fact, companies that outline goals that they want their employees to meet within a certain period find that their employees are often more efficient, completing more tasks in less time. Naturally, this often results in increased earnings for both employees and the company itself.
Research from the National Academy of Sciences investigating the social science behind pay-for-performance, has highlighted two theories that have been extensively tested and can provide convincing arguments on how pay-for-performance can enhance employee productivity and motivation.
The expectancy theory predicts that employee motivation and performance will increase if the following conditions are met:
– Employees understand the plan for the performance goals and view them as achievable with their abilities and skills.
– There is a clear link between performance and pay increases that are communicated and followed through.
– Employees value pay increases and view the pay increases associated with meaningful work to justify the effort required to achieve the performance plans.
Goal-setting theory complements expectancy theory predictions about the links between pay and performance conditions and how employees see performance goals as achievable. This theory improves performance when goals are specific, moderately challenging and accepted by employees.
These two theories predict that performance pay can improve performance by directing employees’ efforts towards company goals, increasing the likelihood of achieving them given that the goals are achievable and there is clear communication and feedback.
Performance plans can reduce employee turnover.
People today are less likely to stay with one company for an extended period. When pay is performance-based, your employees get to see the outcome and reward of their work without seeing their salaries capped.
As a result, employees are more likely to enjoy the perks of performance-based pay and are less likely to jump to a salary job elsewhere.
These benefits explain exactly why performance pay is worth your time and effort. Performance pay plans are necessary to keep up with today’s talented market and help employees grow professionally due to their desire to be rewarded.
Frequent rewards can also lead to increased employee retention. In addition, it will lead to greater productivity and low turnover costs and help motivate employees to stay at your business.
