Performance-based pay is a great way to encourage motivation among employees. The compensation variations come in many forms, and each form will present a variety of benefits and challenges, depending on the structure of your company. Therefore, it may take some experimenting to determine which form of performance-based pay works most effectively for your business. The following variations are some of the most common types of performance-based pay plans:
Performance bonuses are quite common among companies, and they represent a fairly basic form of performance-based pay. A company rates the performance or productivity of an individual employee, a team of employees, or an entire department and then uses those ratings to award the employees a special bonus. These bonuses are often not awarded in predetermined amounts and are generally given only for exceptional performances. While this type of performance-based pay can be very effective, management must be extremely careful in the implementation of these types of awards. Because the bonuses are often not given in equal amounts or frequencies, arguments may be made for favoritism, which could actually serve to decrease employee motivation, giving you the opposite of the desired effect.
Gain sharing is a method of compensation that divides the financial rewards of a business’s improved performance among all levels of the company. Gain sharing encourages increased productivity among employees by awarding them a pre-negotiated percentage of the financial gains caused by their department or team’s hard work. The basic premise is that as employees see how their work directly benefits the company, they will be motivated to continually increase their effectiveness in order to receive further financial rewards.
Superficially, profit sharing is very similar to gain sharing, but the differences between the two plans are very important. Profit sharing is not linked to an individual or department’s performance, but rather is related to the profits of the whole company. Like gain sharing, the increases in the company’s profits are divided among employees according to a predetermined formula, but unlike gain sharing, the focus is not on the effect of one single employee or department. Instead, profit sharing aims to highlight the importance of teamwork in a business by dividing the rewards among all employees, not just those in a specific department or team.
Skills-based rewards involve paying employees more based on the number of skills they obtain and apply directly to their job. Some companies, instead of giving automatic annual raises, opt to provide employees with opportunities to receive additional training. If the employees choose to attend these training sessions and employ these newly obtained skills in their jobs, they are then financially rewarded based on a set system. The reasoning is that everybody wins: The employee receives additional financial compensation, and the company receives the benefits of a highly skilled and productive employee.
All types of performance-based compensation plans are an effective way to foster a motivational work environment. Employees who do not feel as if their hard work is appreciated are unlikely to remain loyal to their company or continue providing exceptional service. In contrast, however, if employees feel that they are compensated for their contributions and productivity, they will be more likely to continue those habits that help to improve your company.