Pay for performance is the need of the hour. However, implementing it without proper planning may backfire

At a time when companies are looking at increments as a tool to retain their best talent and to weed out the non-performers, giving salary raise across the board doesn’t make much sense to them. One term that has caught fancy of HR professionals across the globe is ‘pay for performance’, which links salary hikes to employees’ performance. Amer Haleem, Country Manager for Productized Services- Hay Group India says, “Pay for performance is the refrain that majority of organizations are sticking by, with payouts being influenced widely by both individual and company performance. One measure of how strongly this trend has picked up lies in the fact that a very significant 96 per cent of organizations have made payments related to variable pay in the last 12 months.”

In today’s competitive scenario this step seems just fine: It encourages performers, helps improve productivity and goes a long way in retaining productive resources. On the flip side, wrong implementation can make it backfire. Here are three ways that may make pay for performance work for you:

1. Take your employees in confidence:
Yes, pay for performance is implemented to send across a clear message but this doesn’t mean that one fine day the HR should walk in and declare this. Employees (whether they are below- average performers, high performers or average performers) wait for increments all year long. In case there is some change in the performance appraisal system, they should be apprised of this well on time. They should be informed about how this process will work and how they will benefit from it. It is essential to have a constructive discussion with employees (even when the decision has been taken beforehand), inform them about the challenges facing the organization and how these changes will benefit them in the longer run. Equally important is to implement this decision across the board so that seniors too are judged on the basis of their performance. This step is necessary to save employees from the anxiety that usually follows such decisions.

2. Give more than one appraisal opportunity to your employees:
A winning pay for performance policy needs an innovative strategy. Before telling employees that they will be appraised only once a year will affect their morale, unless they do not see any other appraisal opportunity for themselves. There are various ways to engage such employees: attaching small benefits to achievable targets, bonuses for outstanding achievements, small perks for consistent performers, not only help in engaging the employees, they also encourage them to perform by recognizing their performance. Haleem points out, “The need to motivate the workforce plays a major role in creating a pay-for-performance culture, in addition to the need for instilling a sense of ownership amongst employees as well as encouraging long-term sustainability.”

3. Find ways to link their performance to their pay benefits:
In an article titled Can Pay for Performance Really Work writer Janet Wiscombe recommends a stake for employees in the company. Wiscombe gives example of Nucor Corporation which gives stakes to employees. She writes, “The Charlotte, North Carolina, company – which employs 8,000 people at 22 p-plants in nine states—has the highest productivity, the highest wages, and the lowest labour costs per ton in the American steel industry.”This strategy has proved effective for many companies. Not only it gives the employees an opportunity to grow, it also helps boost company productivity. One shoe doesn’t fit all. So giving sizeable stakes to your employees is something that cannot work for every company. Moreover, not every company may want to do this. To make pay for performance work, it is essential to come up with a winning strategy that suits company’s goals.