Have you implemented a pay-for-performance system? Is it effective? Nearly 40 percent of workers say their compensation is tied to performance in some way, either at an individual, group, or company level. Because pay-for-performance systems use bonuses and merit increases to motivate employees to go the extra mile, they can be a great way to achieve departmental or organization-wide goals and can be a key component of your compensation administration.

These systems can be extremely effective; they provide employees with extra incentive to excel. But they may not be right for your organization because their success often hinges on organizational culture, industry conditions, and buy-in from the executives. If you’re considering implementing a pay-for performance system, you should first understand what it entails. In a BLR webinar titled "Pay-for-Performance: Pros, Cons, and Assessing Whether It’s a Good Fit for Your Organization," Brooke Green outlined how to do that.

What is Pay-for-Performance?

Pay-for-performance is "any type of compensation or reward that’s provided only when certain performance results occur," Green advised during the webinar. "This is compensation that’s contingent upon company performance, group performance (meaning possibly a department or a team), or individual performance, and oftentimes it’s actually a combination of some of those. So, in other words, if performance targets are not achieved, a certain amount of pay is withheld."

These systems typically revolve around a certain part of pay that is at risk. This may be merit increases, incentive plans, or profit sharing for example.

Pay-for-performance is not

• Any type of guaranteed compensation an employee receives regardless of how they perform (i.e. a salary, a guaranteed bonus).
• Uniform salary increases that are given across the board to all employees, such as cost-of-living adjustments.
• Salary increases and bonuses that do not vary much from year to year and end up becoming an entitlement.
• Giving a title increase in lieu of a pay increase.

In a follow-up article, we’ll share Green’s tips on assessing whether your company is a good candidate for a pay-for-performance system.

For more information on pay-for-performance, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Brooke Green is a principal with Hay Group, where she provides consulting advice and implementation assistance to clients with compensation support needs. Her particular focus is on the design, communication, and execution of broad-based compensation programs within public, private, and nonprofit organizations.