Checklist: Avoid the Pitfalls of Performance-Based Pay

By: Jennifer Leahy
September 12th, 2011

You get what you pay for. Or so it’s been said.

No matter how much your employees love their jobs, they likely arrive each day because they’re being paid for their effort. Conversely, there are some problems that no amount of money can fix, such as poor employee morale.

Though performance-based pay has its proponents and can be an effective motivator in certain situations, there are situations that should ideally be avoided. Reward systems that are either tied to compensation, such as commission, or bonus pay, can boost or deflate a corporate culture. Avoiding the following pitfalls will allow business owners to best reward their workforce and generate engaged, enthusiastic and empowered employees.

• Competition. In certain environments competition can be inspirational. In others it can be destructive. Be sure that the performance goals that you establish don’t pit members of a business unit against each other. While it may sound good to reward the “top performer,” human nature may spur some sabotage amid co-workers when they’re in direct competition and there is only one prize.
• Poor communication. Effective and accurate communication is critical to any business and especially any performance-based system. Be extremely specific about what is expected of employees and the ramifications of poor performance. All supervisors should be open to questions and suggestions from employees. They may have a different perspective.
• Broad-based rewards. If the company profits, then so should each member of the team, right? Remember the “group projects” you participated in while in high school? Did you ever feel like each and every member contributed equally? Rewarding everyone for group performance can cause higher-performing team members to resent lower performing counterparts and erode team unity. It can also cause lower-performing employees to give up once it’s clear that they will succeed based on the efforts of others. Individualizing goals will allow all employees the opportunity to excel.
• Unattainable goals. If it’s not feasible for an employee to attain their goal they will give up immediately. Talk with employees about what an attainable goal might be for their position. Seek their input on possible obstacles to their success and ask for their help in setting goals. By involving and empowering employees you automatically engage them; engaged employees boost the bottom line of any business.
• Focusing on cash awards. While the obvious reward in a performance-based system may be a monetary bonus, there are numerous ways managers can compensate for performance. An extra paid day off, tickets to a play or sporting event, gift card or even the luxury of leaving an hour early or coming in an hour late for a week or month can be used as “carrots” to dangle in front of employees.

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