Compensation Strategies and Employee Motivation

It is common knowledge that employers use different compensation strategies to motivate their employees. Most often individuals are provided with base pay to engage with the company and ensure their continued participation. In many cases, base salary alone will only spur an employee to work at the level required for them to keep their job. If employers want staff members to perform at a superior level, they likely have to offer employees the opportunity to earn incentive (i.e.—additional) pay.

Incentive plans
are one such way to motivate employees to expend more effort, but they are usually not very flexible. Most incentive plans involve a pay-for-performance arrangement in which employees are rewarded for the achievement of specific objectives. These types of compensation strategies tend to be of medium-range duration, and include performance criteria that feature broad operational or financial metrics. Limitations include the fact that many important performance “events” occur over an irregular timeframe rather than a standard cycle; employees’ impact on plan criteria may be narrow or subject to uncontrollable factors; and the fact that employees may not see the trade-off of their extra effort for a set level of payout to be attractive enough to motivate them. For these reasons, employers should consider other compensation strategies to engage and reward their top performers.

One such option is side agreement compensation; a variable pay plan whereby an employer and employee negotiate a closed-ended exchange with the help of a Professional Employer Organization (PEO). These agreements are most beneficial when the employer wants to achieve an outcome that is both tangible and has a measurable monetary value to the company, but may be an extraordinary part of the employees’ job (i.e.—a special assignment or project). Payout is made conditional on producing a specific work outcome, so employees are not limited by the constraints of typical incentive plans.

Working with a PEO to facilitate side agreement compensation ensures a fair exchange for both parties. The PEO acts as a facilitator, interacting with the employer and employee to establish mutually acceptable exchanges on a pre-determined basis. Specifically, the PEO assists in defining and formalizing the terms and conditions of the agreement so that employees have a concrete understanding of expectations and rewards. This ensures continued motivation and increased productivity, which benefits both parties over time.

Though many different compensation strategies exist, side agreement compensation is one that all employers should consider. By involving a PEO as a third-party mediator, employees are made to feel like they are receiving a fair reward for their efforts, and will likely put in extra effort to produce exceptional results.


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2 responses to “Compensation Strategies and Employee Motivation


Hi good day Mr. Weinberger, I would like to ask when did you post this? I want to put in my research study as reference. Thanks.

Insperity Blog

Good Morning Larry, This article was posted on 3/21/2012. If you’re seeking a more recent one covering the topic of compensation, this article was posted on 9/1/2016: Thank you!

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