Performance-based remuneration is an approach that pays employees based on how they perform their job. This approach lifts employee motivation and engagement, which in turn boosts organisational performance.
Studies around the world show that performance-based remuneration is a game-changer for employee satisfaction and productivity. An analysis by UK academics showed that performance-related pay was positively associated with job satisfaction, organisational commitment and trust in management. Another study found that organisations with a formal pay-for-performance philosophy are more than twice as likely to have above-average or excellent employee engagement.
“In the South African context, our experience has shown how well-designed performance-based remuneration systems can deliver enormous gains for companies that range from struggling industrial firms to high-tech services companies. One of the most powerful benefits is the way it can reorient employees towards customer- and growth-based outcomes, delivering tangible benefits to the business,” says Jeff Ryan, MD, AWCape, a Sage Business Partner.
“What’s more, performance-based remuneration can be a mechanism for sharing wealth in a country characterised by high levels of income inequality. In helping the business to grow, employees know that they will also prosper. They will be more engaged and driven, knowing that the potential to earn more is in their hands.”
Although there is compelling evidence that pay-for-performance can work well for nearly any organisation and job role, South African organisations have been slow to embrace it.
Many organisations are not sure where to start; others fear that there will be significant organisational cultural barriers to overcome. Based on their company’s experience, Ryan shares a few tips:
Align performance metrics with your company’s goals
Moving towards performance-based remuneration is a massive cultural and strategic change for any business. It is often implemented in lockstep with other organisational changes such as simplifying business processes and moving towards a more customer-centric business model. The shift should thus start with a clear view of why the organisation wants to change the compensation model and the outcomes it is aiming for. What are the critical success areas in your business? What are the people-related drivers?
Define fair and objective measurements of success for each role
Once you’ve decided on the high-level drivers and implications of a shift towards performance-based remuneration, the next step is to decide on how performance will be measured across each role in the business.
It may help to speak to team leaders and managers to evaluate which metrics they see as the most important performance indicators. To get buy-in, the metrics must be fair and achievable.
We find questions that can be answered with a yes or no are a more reliable and objective way to measure performance than using a scale from 1 to 10 or assigning a percentage to rate how well the employee performs a task. For a factory worker, we might ask for a daily yes/no about whether their work conformed to a specific quality standard, or produced x number of units or whether they were on time each day.
Decide how performance-based remuneration will work
There are many ways to implement performance-related compensation, from quarterly bonuses for meeting and outperforming KPIs or variable pay based on monthly performance to profit-sharing and rewards such as extra paid-time-off.
Different approaches may be suitable for distinct roles and companies. The key is that the rewards need to be significant enough to motivate employees to give their best and that they are sustainable for the business.
Communicate openly with employees
For a performance-based remuneration model to pay off, an organisation needs a supportive and participative management style. Employees need to know that they will be provided with the help they need to meet their targets.
It’s also important to create channels for effective two-way communication, and not just in the quarterly or monthly performance review. Employees need to be kept in the loop about what is expected of them, how they’re doing and who they can turn to for help.
Put appropriate technology in place
Accurate, timeous data about each employee’s performance against their assigned metrics is the key to a successful implementation of a positive performance-based remuneration programme.
It’s possible to track these metrics in a spreadsheet, but a robust human resources management platform with performance management functionality will streamline reporting. Not only will this save you time; it will also help to boost employees’ confidence that their metrics are tracked in a fair and precise manner.
Shake up your approach to compensation
In a world where performance is paramount and companies face stiff competition for the best talent, performance-based remuneration can help your business attract, keep and motivate high-performing employees. By paying for performance, you are rewarding people for bringing their best, in turn improving productivity and business results. Rather than settling for mediocre, inflation-linked increases each year, you can align your employee’s performance with your objectives and outperform the market.
