There are quite a few different methods for paying your employees. While paying employees a monthly salary or by the hour is most common, another type of pay is performance-based pay. This pay strategy allows employees to earn their paycheck based on the performance benchmarks they hit, rather than receiving a set income. An example of this is a summer salesperson who earns commission. Performance-based pay has benefits and drawbacks. Here are some of them:
- High-Performing Talent Will Thrive: High-performers tend to thrive in environments where high-performance is rewarded. Additionally, when you’re looking to hire new employees, high performers will come to your company for the rewarding pay.
- Expectations are Clear: Performance-based pay puts employees in control of their paycheck. With the transparency involved in this system, employees can clearly see what level they should be performing at and will be rewarded immediately when they hit performance goals.
- It’s Easy to Solve Performance Problems: You will know quickly if an employee is performing below average. Then, you can address the employee and solve performance problems quickly. If the performance issue is related to company processes, you can resolve that before it affects other employees’ performance.
- Quality May be Sacrificed: When quantity is emphasized, quality can get pushed to the side. If your employees are working quickly to reach performance benchmarks, they may be producing lower quality work.
- You May Lose Talent: Performance-based pay isn’t the best option for all employees. It can cause stress and a decrease in motivation for some of your workers. Because of this some talent in your organization may leave if you choose to change to performance-based pay.
- It’s a Difficult Adjustment: Changing to a more competitive performance-based pay system can take a long time for your employees to get used to. Additionally, if your company takes a new direction that requires you to change away from performance-based pay, changing back will be a difficult transition.
- You Must Maintain Legal Compliance: Make sure that you are still complying with all wage payment laws including the Fair Labor Standards Act (FLSA) for minimum wage and overtime even if you are using a performance-based pay model. You may still need to track employee time for this reason.
Performance-based pay isn’t an all-or-nothing setup. Frequently performance-based pay is used for bonuses or raises and doesn’t determine an employee’s entire wage. If you want to lessen some of the negatives of performance-based pay, consider offering a wage and performance-based pay as a supplement.
Performance-based pay can be beneficial to your company. Consider the pros and cons and clearly communicate with employees before making any decisions on pay.