Performance-Based Pay Won’t Motivate Employees as Much as You Think
Compensation that is based on an employee’s contribution to the organization is known as performance-based pay.
When the business and the person both perform well, this kind of remuneration is excellent, but it also has drawbacks.
Despite the fact that many businesses think performance-based compensation schemes inspire workers and foster good attitudes, employees often feel that it places too much pressure on the job.
This post is for company owners who are thinking about performance-based compensation for their staff.
Employers have grown to like performance-based compensation over time. Sadly, it may not be as efficient as some people think. According to studies, certain incentive-based compensation arrangements have unfavorable outcomes instead of inspiring personnel.
What is performance-based pay?
Performance-based pay, as the name implies, ties employee remuneration to their contributions to the business. Consider a commission-based car salesperson: If no vehicles sell on a given day, the company doesn’t make money, thus the workers don’t either.
Only the most productive staff will survive thanks to this wage system. Many companies claim that it’s an excellent technique to raise staff productivity.
However, those who work in professions that use this payment system may not always earn more money. According to the U.S. Bureau of Labor Statistics, the average annual salary for retail salespeople is just $24,340. When you realise that a home costs around $200,000 and a Super Bowl commercial costs $5.6 million, it is less amazing that real estate and advertising sales agents make an average of twice that much. The commissions from these sales are few and distributed across a large sales team. In summary, performance-based compensation is excellent when both the employer and the employee perform well, but it has drawbacks as well.
Employers may find it challenging to monitor performance-based compensation since employee performance might fluctuate. One of the top online payroll software solutions should be used by businesses that wish to better monitor their payroll, particularly when switching to a structure like performance-based bay.
Research examines performance-based pay models
According to a research in the Human Resource Management Journal, while employees who get performance-based pay—pay that is based on either individual or corporate performance—work more, they also experience greater levels of stress and lower levels of job satisfaction.
According to the study, workers who are paid based on performance or who are aware of how well their business is doing financially are more likely to believe that they are being pushed to work too hard. The authors of the research concluded that this pressure cancels out the increases in employee productivity that the compensation structure is intended to bring about.
According to Chidiebere Ogbonnaya, the study’s principal author and research fellow at the University of East Anglia at the time of the study, it is the first to highlight the shortcomings of performance-based compensation structures. He continued by saying that many workers who get performance-based remuneration experience extreme pressure or don’t have enough time to do their assigned responsibilities.
According to a statement from Ogbonnaya, “by linking workers’ performance to financial incentives, businesses convey signals to employees about their commitment to reward additional work effort with higher money.” Employees, in turn, take these signals to heart and feel compelled to put in more effort in order to earn a higher salary.
Although workers may appreciate these revenues and see the compensation structure favourably, the corporation is the real winner from their additional work.
As a result, Ogbonnaya stated, “performance-related compensation may be seen as predatory, or as a management tactic that raises both wages and labour intensity.”
What about organizational performance-based pay?
The researchers found that performance-based compensation had a favourable influence on work satisfaction, employee commitment, and management trust if the profit-related pay was dispersed fairly across the firm when they particularly examined pay associated to corporate earnings. Lower levels of job satisfaction, employee commitment, and management trust were seen in the research when just a small percentage of the workforce received remuneration that was directly tied to profit. In other words, it’s quite common to share the riches.
According to one of the study’s authors and a professor at Norwich Business School in the U.K., Kevin Daniels, businesses should have effective, fair procedures in place for allocating organisational earnings in order to avoid overlooking eligible workers.
Employees may demonstrate better acceptance and react with favourable attitudes if profit-related remuneration is distributed across the organisation, according to Daniels.
The report was based on questionnaires completed by 13,657 workers and 1,293 managers in 1,293 British organisations.
Does pay increase performance?
Pay does not, at least immediately, affect performance, as several studies have shown. Regardless of how much you pay your staff, they will ultimately go through their daily rituals. That is what will occur if such activities incorporate laziness and performance deficiencies.
Furthermore, a Harvard Business School research discovered that not all workers react well to incentive-based compensation. Professionals in accounting or human resources, for instance, would prefer a regular wage to commission for each report they do. Even in operational settings, salary raises and incentives for large amounts of effort may be helpful.
There is also a potential of corruption: If workers find themselves in dire financial circumstances outside of the workplace, they could manipulate the system to increase their salary. Due to this problem, Wells Fargo retail bank staff opened client accounts falsely in order to satisfy excessive sales goals, which at the end of 2018 led to a $575 million lawsuit.
Pros and cons of performance-based compensation
There are advantages and disadvantages to adopting a performance-based pay model.
It increases high-performing talent recruitment and retention.
Top performers are motivated to remain when they know what is expected of them, meet or exceed those goals, and profit from the benefits. In order to create the perfect workforce, your HR staff may examine the characteristics of these top achievers and spot those characteristics in potential recruits.
It highlights areas that need work.
Business executives may identify “weak links” by using performance-based compensation since it gives team members’ contributions measurable worth. You may find areas in your company that need improvement, such as training procedures, management, and communication, by first identifying the poor performers and then examining why they are performing below expectations.
It could improve output.
Because of the nature of the pay system, workers who contribute more to the business are compensated more, which promotes greater productivity. Team members may utilise these expectations to finish work more quickly in organisations that employ pay-for-performance remuneration. These organisations often use a calendar or timetable to manage deadlines.
It establishes precise standards.
With performance-based pay, the employee has a greater say in their salary and may raise their own income. In addition to giving the employee greater control over their salary, this creates clear expectations for increases, which prevents misunderstandings and promotes openness around the topic of pay.
It might lead to favouring quantity above quality.
Businesses should carefully consider the proverb “quality over quantity” before deciding if performance-based compensation is the best option for them. Since quantifying achievements is the obvious yardstick for this compensation structure, you should emphasise the value of excellent work to your team when assigning tasks to prevent hurried, below-par labour.
It may have a detrimental impact on corporate culture.
Not everyone is designed to thrive in a performance-based environment. People on the team who aren’t at ease in a competitive setting may not like the framework. Performance-based compensation has a tendency to place more emphasis on an individual’s successes than a team’s accomplishments, which may undermine cooperation and teamwork. According to the research described above, it may also result in increased stress and decreased staff morale, both of which have a negative impact on business culture.
Change is challenging.
It’s extremely difficult to alter after a team has been used to performance-based compensation and the advantages it offers, particularly for goal-oriented team members who live on the challenge of exceeding a target. Even if you determine that a different compensation structure will benefit the firm as a whole, changing it can lose your business its best performers.
Tips for making performance-based pay work
Making performance-based compensation enjoyable might help you adopt it and inspire your staff. In a manner that inspires and motivates them, remind your team members that their livelihoods and success are entirely in their control. To inspire your team, post leaderboards, create objectives, and track progress toward those objectives.
Additionally, you could buy prizes like a bike, the newest gaming system, Bluetooth headphones, a laptop, gift cards, or tickets to an event. Put a showcase with all the goodies within. Employees will remain motivated and have something to concentrate on as a result.
Alternatives to performance-based pay
In the investing sector, such as for hedge fund and portfolio managers, performance-based compensation is anticipated; nevertheless, comprehensive pay structures are more typical in most other businesses. Employees often only encounter performance-based pay in the context of incentives and supplementary benefits, not as part of their regular salary.
Before choosing if performance-based pay is the best option for your workforce, you need take into account a number of alternative compensation models. The most typical kinds of pay for workers are hourly pay and salary, which often include “indirect compensation” in the form of perks like insurance and annual increases.
A kind of remuneration more closely aligned to performance-based pay is commission. It may be provided in addition to pay and often represents a portion of a person’s or group’s efforts to the business.
Everyone may not be a fan of performance-based remuneration. While some workers like it, others want a consistent, predictable wage. Performance-based compensation may be effective for businesses of any size with a well-executed incentive scheme, but be sure to first take into account the requirements of your workers and the alternatives.