By measuring and rewarding performance consistently, employers can enable qualified employees to reap the benefits of hard work and dedication in the form of additional compensation.
Successful pay-for-performance systems start with comprehensive planning. Companies must have effective appraisal systems in place so that managers can distinguish between different levels of performance. In turn, employees must clearly understand expectations and have the skills, knowledge, and experience to complete tasks that warrant either merit pay or variable pay. (Merit pay typically results from an employee’s individual achievements, while variable compensation results from either employee or organizational success.)
To design an effective variable compensation program, the U.S. Office for Personnel Management recommends that companies develop policies that clearly define the intent of the program, establish eligibility, describe levels of participation, and determine performance criteria. Then, the company can allocate funding, schedule pay-outs, determine the impact to benefits, and set up administrative tasks. By setting program goals that are specific, measurable, attainable, realistic, and time-constrained, successful businesses can evaluate their variable compensation programs on an ongoing basis. This ensures that all activities align with the company’s strategic objectives.
Additionally, employers should not implement a variable compensation program without carefully considering the overall impact to business operations. The U.S. Fair Labor Standards Act mandates that employers include some types of variable compensation in an employee’s hourly wage rates. This may affect overtime calculations for payroll. Also, don’t assume that offering money alone motivates people to work, that motivating people automatically improves their performance on the job, or that assessing performance is easy.
With that said, offering variable compensation can make employees feel more closely linked with the company’s financial success. Employees may feel a heightened sense of responsibility and take their jobs at the company more seriously. Whether employees at all levels participate or variable pay is offered only to those in executive roles, it makes good business sense to reward employees for increased efficiency, higher production, or improved sales.