Advantages and Disadvantages of Pay for Performance

What is performance based compensation?

Pay for performance, in English known as pay for performance, is a way of remunerating workers based on their performance in the work performed. This type of remuneration is often used as a bonus or incentive by leaders and human resources teams, since it allows the employee’s productivity to be aligned with the organization’s objectives.

Although this incentive system is not new, with the growth of independent workers in recent years, companies have progressively increased its implementation. Some studies even suggest that employees prefer performance pay to other types of bonuses.

In this way, performance-based compensation consists of the employer providing workers with an economic incentive (since there are several types of work incentives, which can also be non-monetary) for exceeding the expectations of the organization. In other words, reward the worker for his good results and high performance.

In general, those who participate in the development of these compensation systems are the owners, managers, leaders and the human resources area.

Differences between performance pay and salary

Salary is always agreed in advance. Performance pay is usually as well, although sometimes it may not be set in advance.
The salary is granted to the worker with a determined frequency, after a pre-established period of work. Performance pay does not have a set frequency, but can be inconsistent.

The salary is of an individual nature, that is, it is received by a single worker. Performance pay, on the other hand, can be individual, group, or even received by the entire organization.

Similarities Between Performance Pay and Salary

Both payment systems are monetary, that is, they are delivered in cash and not in vouchers, giftcards or non-financial benefits.

Having a competitive salary, as well as providing workers with pay-for-performance schemes are elements that attract talent.

Advantages of performance compensation systems

Boosts motivation and productivity

Many employees lose motivation because they have been rewarded in the same way for a long time and have no reason to drive them to improve their performance. However, we all know that a motivated employee can make a big difference in the success of any organization, and it is here that variable pay models play a very positive role.

Economic increases in terms of performance reward the most productive workers, so they are an excellent way to motivate your employees to do their best.

Align the work of the employee with the success of the company

In many organizations, employees only care about doing their job, without the company’s success is a motivating factor for them. In this sense, variable remuneration systems offer a great advantage since they are an excellent way to link the work of employees with business objectives.

What aspects of business do you need to improve? Productivity? Communication? Performance compensation methods will help you focus your employees’ attention on the company’s priorities and this will allow you to boost your business.

Help attract and retain talent

If the most talented and qualified employees are not recognized as they deserve, they are likely to leave your organization and go in search of another company where they are offered better opportunities and rewards. Thus, variable pay systems are an excellent way to retain your most qualified workers and attract the best talent.

Disadvantages of Pay for Performance

The rivalry between employees and lack of cooperation

Variable compensation systems can damage the work environment and create conflicts between co-workers.

Let’s see an example. Imagine that an employee considers that he has done a very good job and deserves to be rewarded for it. However, for one reason or another, your partner is who receives the increase, and not him. He will be resentful, which will generate a bad environment in the workplace that will harm the company’s well-being.

This compensation method can also compromise teamwork and create insane competition among workers. Everyone will want to do better than the rest to receive a greater increase, so it is possible for employees to become rivals, and collaboration between teams disappears.

Difficulties to measure performance objectively

Another drawback of this model is that it is difficult not to fall into subjectivity when measuring the performance of an employee. If you fail to draw up a performance compensation plan that evaluates your employees fairly and objectively, this method can be counterproductive for your organization.

Variable compensation may be perceived by employees as “favoritism” towards other employees, and they will feel they are being treated unfairly. If favoritism happens, your workers are likely to stop trusting you and, as in the previous case, feel resentment towards employees with greater incentives.

Economic compensation can overshadow other important things

When getting a salary increase becomes the priority of the employee, he will only focus on the indicators that will evaluate his performance, useful to get a reward for his performance.

However, there are many other equally important elements in a good employee, but being more intangible and difficult to measure, workers could forget them.

If you see that a variable remuneration system does not fit the culture of your organization, do not forget that there are many other ways to incentive your employees, and they do not have to involve an economic payment.