Choosing the right compensation policy ranks among the most vital management decisions in any organization. If the employees are well-rewarded, the organization will achieve improved productivity and also get to retain top talent.

Today, most organizations are embracing the pay for performance plan to financially reward employees who achieve and exceed the set performance standards.

So, before you jump the gun and choose this mode of compensation, let’s, first of all, discuss the pros and cons of performance-based compensation.

What is performance-based pay?

As the name suggests, performance-based pay is a mode of compensation where a company rewards employees depending on how well they perform. This kind of payment is mostly prevalent in sales jobs, where bonuses and commissions are provided, depending on sales closed or money secured.

Advantages of pay for performance

Motivation

Motivation is arguably the best advantage of using pay for performance compensation. With this plan, employees will be motivated to work harder and increase their income levels. On the other hand, the company will enjoy increased productivity because the employees can deliver more in a shorter period.

Talent retention

In this case, it’s the employer who benefits the most. That said, a high-paying company is typically able to attract top employees and keep them for longer. If the employees feel comfortable with the commissions and relationships, they have no reason to jump ship.

Improved communication

With performance-based pay, employees who want to increase their productivity will be more willing to disclose their weaknesses. In return, human resource leaders and sales managers can design practical training and development programs.

Job flexibility

Most top talents prefer to work within flexible hours rather than the boring 9-5 jobs. Here’s the thing; most organizations that offer performance-based pay plans have flexible working hours. This can leverage their employees’ lifestyles as well as minimize the use of resources such as office space.

Disadvantages of pay for performance

Pay disparity

If a company has a particular group of employees who are not on a performance-based plan, it can create unnecessary animosity in the organization. Hourly or salaried workers may become discouraged because they might feel that their efforts are not recognized.

Offers short-term solution

Gone are the days when employees only cared about big paychecks. Modern employees want to enjoy their work by being well-managed and without feeling constant pressure. It won’t even take long before employees source for another well-paying job with a healthier working environment.

Unfair judgment

In most cases, a reward-based system ignores fundamental reasons. For instance, the sales manager might blame the sales team when they don’t hit the set targets. However, the real problem might be pricing or packaging.

The Bottom Line

Overall, the pay for performance compensation plan is a win-win scenario. As the employee works harder to meet targets and get more incentives, the company enjoys more profitability. However, remember to set realistic goals for the employees and provide a healthy working environment.