Pros and cons of performance based pay

Finding the right compensation strategy for your business is a major part of attracting the best talent. One way to do that is with a performance based payment system, that hands out monetary rewards whenever a predetermined goal is achieved. In this article, we explore this concept a bit further and take a look at the pros and cons of performance based pay, so you can make an educated decision for your company’s compensation strategy.

Performance based pay is a type of employee compensation that gives monetary rewards to those workers who go the extra mile and perform exceptionally well in their job. 

Performance based pay, which is often also referred to as pay for performance, is given in addition to the baseline salary whenever an employee is exceeding the employer’s expectations. 

In order to measure the performance, employers have to come up with a way to track results and identify criteria that trigger the performance based pay. One common performance indicator is achieving a milestone in a project.

Providing performance based pay to your workers comes with a lot of benefits for your business. Here are some of the advantages of performance based pay.

Employee motivation

We all want to be acknowledged for the great work we are doing, and one major way to do that is through monetary compensation. Knowing that achieving a certain goal means receiving additional pay can be a big incentive to put in extra work and exceed performance expectations.

Increased productivity

Highly motivated employees tend to perform better and work more efficiently and productively. This means that offering a monetary reward for performance can actually make you more money in the long run, and see outstanding results in your company’s overall productivity.

Attracting the best talent

Finding the right people to hire is a challenge, and with more and more companies exploring home office and remote work, the fight to get the most skilled and experienced employees is getting more intense. Having a competitive compensation package can be a big help in attracting the best talent, and also the right type of people who are motivated by performance based incentives.

Employee retention

If you have hired employees who are performing well and are a good fit for your company, you probably want to keep them around as long as possible. Performance based rewards can play a big factor in employee retention, and might just be the right incentive for them to stay where they are.

While there are plenty of positives, performance based pay also comes with a few disadvantages, that may affect your employee’s happiness and performance.

High stress levels

A recent study published in the Human Resource Management Journal found that employees who receive performance based pay work harder than those who don’t - but also experience higher stress levels and lower levels of job satisfaction. These employees are more likely to think they have to work longer and harder to meet expectations and get bonus payments.

Affects productivity

While some people work well under pressure, others might be affected more negatively when confronted with performance based payment systems. Some of your low-performing employees might be less motivated to improve their work output by seemingly unreachable performance goals, and end up reducing their efforts even further. Defining achievable and measurable realistic goals is key to motivate even the low-performers.

Disruption within teams

Seeing your coworkers being financially rewarded for their work and not receiving anything yourself can be quite challenging - and it can quickly cause disruption and unease within a team environment. Furthermore, when employees start to focus more on their own performance in order to receive additional pay, overall teamwork and team output can be negatively affected, as well.

Focus on potential shortcomings

When performance starts to play a bigger role, you might start to realise that some of your employees are actually lacking the experience or knowledge to achieve goals and receive extra pay. This can not only lead to employers having to invest more money in training or additional resources, but also affect your employee’s motivation and cause general dissatisfaction with their job.