Performance-Related Pay: Good or Bad Business Strategy

Performance-related pay is a hot issue, particularly in a time when the economy is less than perfect. Performance-related pay has been used in the past as a way to encourage employees to improve their productivity or their efficiency, however, experts in industrial psychology do not agree on whether this strategy is effective or not. As an employer you need to look at what the implementation of a performance-related pay scale is telling your employees about what your company values and how you view their position in the company.

Performance-Related Pay Options

There are several different ways that you can implement a performance-related pay option. The first option it is to based the employee's entire salary on their performance. This is a common strategy used by MLM companies. The commission rate that the salesperson receives is based on how much product they sale.

The second option is to base bonuses on performance issues and statistics. This option is used by many white collar companies such as advertisement agencies and law firms. The size of the quarterly or annual bonus that the employee receives is based on how much business they brought in for the company during the period.

Pros of Performance-Related Pay Options

The advantage of utilizing a performance-related pay option is that it can be used to motivate your employees to reach larger sales goals or to improve their productivity. This is particularly true for businesses that depend on the independent performance of its staff. Performance-related pay options can reward those employees that go above and beyond the requirements for the position.

Cons of Performance-Related Pay Options

While performance-related pay options are effective at motivating some employees, they also have the potential to create employee relations problems with others. The problem with utilizing a performance-related pay schedule is that employees are sometimes punished for conditions in their market or industry that they do not have control over. In these situations the employee may invest a lot of time and effort in doing their job and then receive a small paycheck. This discourages them and reduces their loyalty to the company. Resentment can also development among staff members who see one or two people consistently being rewarded while they receive a smaller compensation package for what they consider a similar or greater effort on their part.

Making Performance-Related Pay Options Work

To reap the benefits of performance-related pay options and to minimize the drawbacks of this pay system employers need to strategize what options are going to work the best for their staff. If their staff is made up of employees who thrive on competition then a pay scale that is based on performance may motivate the entire staff to perform well. However, in most cases the best way to utilize performance-related pay options is to use them as a supplemental motivator instead of the employees' main way of earning a living. For example, you can set up a performance-based competition that awards the top performers with a cash prize.