Employee Pay-for-Performance Plans That Get Results

Skilled workers are hard to find — and keep. Little wonder employers are taking a fresh look at so-called “pay-for-performance” (P4P) arrangements that link part of employee compensation to workplace achievement. Such programs attract “A players” with the promise of big rewards for results that boost the bottom line.

“Pay-for-performance programs are powerful motivators,” says Mae Lon Ding, president of Personnel Systems Associates. “They guide employees by highlighting what is really important in their job positions. And they demonstrate that working at the peak of an individual’s abilities will be worth the effort.”

Incentive pay has important advantages over seniority-based salary hikes and year-end bonus plans. “Under traditional compensation programs, employees realize that if they are good enough to survive, they will earn the same pay as the company’s best performers,” says Steven P. Lentini, corporate leadership and sales coach. That realization, he says, encourages mediocrity and dampens the morale of a company’s top talent, who end up jumping ship for the competition.

In contrast, the measurable nature of P4P programs helps build an achievement-based work culture, while ensuring that management and staff are on the same page when it comes to goals, expectations and outcomes. They can even improve a company’s system of employee review. “A P4P program can really help companies weed out underperformers, reward the top players and identify those in the middle of the pack,” says Catherine Rymsha, visiting lecturer, management, at University of Massachusetts -– Lowell.

Finally, compensation-based pay holds a special attraction to the fastest-growing segment of the prospect pool: Gen Zers. “People in their 20s have very clear expectations about how they want to control their careers,” says Daniel P. Moynihan, managing director at Pearl Meyer. “Giving them a modicum of compensation control does just that.”

Avoid Pitfalls

As attractive as they are, P4P programs can be tricky to design well. Poorly implemented ones fail to reward good performers adequately, leading to costly morale issues. The biggest cause of failure is a lack of sufficient attention to the critical task of carefully selecting performance goals, while presenting them in the moderating context of larger company values.

“I think the biggest reason that performance-based compensation programs don’t work is that the managers have not identified the possibility of unintended consequences,” says Chad Prinkey, founder and CEO of Well Built Construction Consulting. “It’s great that people become focused on unlocking additional performance-based compensation. But what happens when they pursue the bonus at all costs, throwing other business priorities aside?”

Prinkey gives an example: “It can be dangerous to have project managers and superintendents earn additional compensation solely on profitability. They have way more responsibilities than that, including quality and safety.” Too much emphasis on the bottom line, in other words, can backfire in the form of rising accidents, shoddy customer service and defective goods.

And how about the costly ramifications of salespeople who push too hard? “Employees too attached to outcomes can fall into the trap of pushing too aggressively for revenues, with the result that customers get turned off,” Lentini says. “Or they might drop prices to make their revenue targets but end up losing money.”

How can employers avoid those pitfalls? Later in this article we will provide an answer to this question. First, though, here are general guidelines from workplace experts:

• Encourage employee buy-in — P4P initiatives will only work if employees are enthused about the possibilities. Encourage their investment in the program by involving them in the initial planning stages, working one-on-one to develop performance parameters that are appropriate, realistic and inspiring. “Let subordinates suggest how they can achieve measurable results that will support larger departmental and company-wide objectives,” Ding says.
• Think outside the box — While most people think first of revenue goals, other categories can be equally important. How about productivity levels? Cost reductions? Quality as measured by error levels and customer feedback?
• Create achievable goals — “A rule of thumb is that employees should feel they have an 80% probability of achieving their assigned standards or objectives,” Ding says. “So, it’s really important for managers to convince their people that the bar has been set correctly, that they have a high probability of success and that supervisors will help them succeed.”
• Set meaningful percentages — The percentage of total pay accounted for by P4P programs will vary substantially. The trick is to offer compensation that is not so low that it fails to motivate performance, but not so high that it affects company profits. “The correct percentage is a function primarily of an individual job’s ability to influence a company’s key performance indicators (KPIs),” Ding says. The greater the potential of a certain position to control a KPI, the higher the incentive pay percentage. Salespeople very often enjoy the highest incentive pay. “It’s not unusual for bonuses in the sales department to come to 50% to 100% of base pay,” Lentini says. Percentages tend to run lower in other departments, typically varying from 5% to 30%.
• Proceed slowly — Gradually introducing a P4P program can keep employees from reacting negatively. “When you rush a program, things get missed and people get upset,” Lentini says. To determine what works and what doesn’t in a particular work environment, companies are advised to begin with test programs that last a year or more and that reward performance with praise and personnel file entries rather than money. “Periodically give employees reports showing what they are making under the company’s old compensation program and what that would look like under the new one,” Lentini says. “This allows them to see what behaviors they will need to adjust.”

Communicate Values

Now let’s address the problem mentioned earlier in this article: How can P4P arrangements reward high performers while discouraging the pursuit of performance goals at the expense of other business priorities? The solution is to hinge incentive pay on conformance to a company’s larger values.

Consider the example of the salesperson who becomes overly aggressive with customers in order to meet a revenue goal. “Employers need to continually communicate that today’s sales methodology is to help people buy,” Lentini says. “The salesperson needs to listen to customers and solve their problems.”

Judging how well employees conform to company values can be more difficult than clocking measurable job tasks. Here’s where customer surveys can help. At many companies, Ding says, feedback from third parties accounts for 10% of the total performance assessment for many job positions, with performance-based assessments making up the other 90%. There are exceptions, she notes. “Feedback surveys might account for 50% to 60% of the assessment at customer service jobs.”

Third-party reports are not a panacea. “The challenge with customer metrics is that people only chime in when somebody does an exceptional job or a less-than-good job,” Rymsha says. “In the middle zone, people typically don’t have much of an opinion and tend to sit on the sidelines.”

An alternative to customer feedback, or perhaps an adjunct, is a so-called “values scorecard,” used by supervisors to assess how well an employee’s actions align with a company’s guiding principles. Depending on the job position, such values might include customer-centered decision-making, teamwork, communications skills, ethics, kindness, attendance, punctuality and safety. “An employee’s eligibility for a performance-based bonus may hinge on how well they have met the employer’s larger cultural and ethical requirements,” Prinkey says.

Reward Everyone

Assessing the job performance of the sales staff and others with measurable duties may be relatively straightforward. But how can P4P arrangements reward those in supporting roles such as receptionists, office managers, bookkeepers and accountants?

“Probably the hardest people in any business to include in an incentive pay program are the administrative professionals,” Moynihan says. “It’s really difficult to come up with scalable measurements for employees with multiple concurrent tasks who keep the train running for everyone else.”

Moynihan suggested trying to isolate little slices of such jobs that can improve efficiency, reduce costs or enhance customer service. Does a receptionist answer the phone within two rings to decrease the client wait time? Has a bookkeeper reduced the costs of paper, ink and other office materials? Has a secretary taken the initiative to update digital calendars and make needed appointments?

If all else fails, the employer can pull the support staff into a higher-level bonus system based on overall profitability. “A company-wide pool can be established for those who are not in direct revenue-generating kind of roles,” Prinkey says. “Their eligibility for the awards can hinge on the results of their values scorecards.”

Well-designed P4P programs can attract top performers to a company and retain them with incentive bonuses linked to measurable goals that support a company’s overriding principles. But top management must be sold on the potential of such a program to drive company success.

“An incentive payment program has to start with the CEO being a true believer,” Ding says. “Otherwise, line managers will not take the program seriously.”

How Good Is Your Incentive Pay Plan?

Does your pay-for-performance plan tick all the right boxes when it comes to employee motivation? Find out by taking this quiz. Give yourself 10 points for each “Yes” answer, then total your points.

1. 1. Have you obtained the buy-in of employees by involving them in the planning of the program?
   2. Have your supervisors met one-on-one with each employee to develop goals that are achievable, motivational and productive?
   3. Have you considered performance parameters such as productivity levels, cost reductions and error containment?
   4. Do the percentages of total pay made up of P4P bonuses reflect each position’s potential effect on a KPI?
   5. Are you introducing the program slowly, on a test or pilot program basis?
   6. Have you considered customer feedback surveys and value scorecards as tools for tempering any abuse of the bonus pay system?
   7. Have you included support staff in a P4P program?
   8. Have you considered department and company-wide P4P plans in addition to individual ones?
   9. Have you scheduled periodic one-on-one consultations with employees to obtain feedback on incentive pay initiatives?
   10. Does top management enthusiastically support your P4P program?

What’s your score? Over 80: Success! You are creating an effective pay-for-performance bonus program. Between 60 and 80: Time to fine-tune your management practices. Below 60: It’s a good idea to re-gear by instituting ideas from the accompanying story.