Critical Elements for Successful Pay for Performance Model Introduction

Variable compensation plans may be regarded as successful if they satisfy the aims the organization had in mind when they were established. The following three aspects will be described.

Does the plan fit the organization?

Pay-for-performance plans are not one size fits all. If a plan worked for another company, that does not mean it will work just as well for yours. In order to be effective, the plan must correlate with the organization’s objectives.

For example, a distribution company based in New Jersey used a team-sharing compensation plan as part of effort to create an organizational culture that was nimble and could more easily respond to changes in the marketplace.

A 700% sales increase in target markets over several years following the implementation of the team sharing plan was an indication of success. All employees, whether they were in sales, warehouse, office, or managerial, were rewarded if company sales targets were met in this program.

However, not all incentive plans are appropriate for businesses. Boeing determined that its “rewards and recognition” program was complicated, perplexing, and expensive, with no impact on employee performance. The initiative was redesigned around the objectives of motivating financial success, client happiness, and good corporate citizenship. Employees responded positively to the changes.

The success of any variable compensation program is contingent on its compatibility with the company’s culture. An incentive system that encourages adaptability and cooperation, for example, is unlikely to succeed in an autocratic organization that follows traditional laws and procedures. In this instance, the incentive plan has been “thrown” into the wrong growth conditions.

Does the plan reward the appropriate actions?

As much as possible, variable pay systems should correlate to desired performance. Employees must see a direct relationship between their efforts and their financial rewards, as the HR Perspective illustrates.

People usually produce better results when they are measured and rewarded for their efforts. Therefore, organizations should make sure that the rewards system is linked with its objectives. Additionally, using multiple measures will help prevent leaving out vital performance aspects.

Assume a hotel reservations center wants to provide incentives to the staff so that they can spend less time on each call in order to improve productivity. Employees may rush customers in order to lower talk time if the reduction is the only measure, resulting in poorer customer service and more bookings made.

As a result, the center should think about rewarding initiatives on a variety of criteria, such as talk time, reservations booked, and customer satisfaction survey results.

In some cases, linking pay to performance might not be the best option. For example, if output can’t be measured objectively, management may have trouble appropriately rewarding employees who perform better with more pay. Managers might also struggle to identify these higher performers correctly.

For example, in an office where tasks include issuing permits for building renovations, individual contributions may not be identifiable or appropriate.

Is the Plan Administered Properly?

A variable pay plan might be complicated or simple, but it will succeed only if employees understand what they have to accomplish to get compensated. The more complicated a compensation strategy is, the more difficult it will be to convey its significance to staff effectively.

Several performance standards are generally recommended for a variable pay plan. Employees should not have to suffer through complex computations in order to calculate their own incentive amounts if there are several criteria.

Managers need to be able to explain future performance targets and what the rewards will be for achieving them.

Creating an incentive plan is never easy, but global programs are infinitely more complicated. Even though a company might have one unifying goal-like improving market share or making more money-that objective usually appears as different goals in various geographical regions.

Global projects must also be able to accommodate cultural differences.