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The Rewards of Performance-Based Compensation

Posted by Insightlink on 12/03/14

The Motivating Impact of Reward and Recognition

Our work with employee surveys has clearly shown that employee satisfaction with the level of reward and recognition at their organization often makes a critical contribution to their overall job satisfaction.

However, few organizations in the U.S. seem to realize this, as employee satisfaction with reward and recognition is not very high – in fact, based on our most recent norms study, the proportion of those who are satisfied (36%) is not much higher than those who are dissatisfied (33%)! Although reward and recognition encompasses more than compensation alone, there seems to be a general lack of knowledge within many organizations about this important issue and its critical role in attracting and retaining a talented workforce.

Communication Is Key

All organizations should have established policies not only for deciding pay and bonuses but also for communicating those compensation policies and procedures to employees. Although three-in-four American employees think it is important to understand how their pay is determined, just two-thirds have this information. Even more critical, eight in ten want their pay to be directly related to their performance but just this is the case for just half of all U.S. employees. Unfortunately, many organizations maintain strict levels of secrecy on these issues, which means that information will be spread through the rumor mill instead. Don’t pretend that your employees never discuss issues of pay amongst themselves.

Furthermore, paying new hires more than established employees in the same positions can cause havoc and grave problems with morale, as current employees can feel their contributions are not being adequately acknowledged. Offering new hires an attractive compensation package that is both market- and performance-based significantly reduces the chance of arousing jealousy among that employee’s peers.

Performance-Based Compensation

According to many compensation experts, traditional formulas of paying employees on a seniority or merit-pay basis often means that organizations cannot properly balance their organizational profitability with their employees’ professional goals. Instead, you can achieve this balance more easily through an incentive-based compensation plan. Research suggests that organizations that pay their employees more for exceeding profitability goals tend to be more profitable overall than organizations that follow more traditional pay policies. However, many organizations retain these pay policies because they are familiar, comfortable and, in a way, less risky.

Of course, compensation plans are not limited to money alone. PTO, insurance and healthcare benefits are often included in pay packages, with flex time also becoming more popular. In our experience, though, employees rarely assign any monetary value to the benefits received and focus primarily on their potential earnings through both pay and bonuses.

Signs of Trouble

What are the signs that employees are dissatisfied with their pay at your organization? Here are several markers to note:

  • You are facing higher-than-normal turnover at all levels and concerns about compensation, combined with higher competitive pay, appear to be a driving force,
  • You are having difficulty attracting qualified new hires who are citing compensation as a reason for turning down your offers,
  • You are hearing numerous complaints about pay among your employees, especially in terms of perceived fairness compared to their peers and/or market rates, and
  • You are experiencing increasing problems with employee morale, which in turn causes poor productivity, interpersonal conflicts and general disengagement.

Several Strategies for Action

Here are some approaches to address high levels of dissatisfaction with compensation at your organization:

  1. First and foremost, remove any inequities in your pay practices.
  2. Ensure all positions are accurately classified, setting clear expectations that more highly graded jobs necessitate having more responsibilities, education and experience, so as to foster a feeling that “fair play” is contributing to differences in pay levels.
  3. Conduct a salary survey so you can get an accurate reading of competitive pay levels within your industry/region.
  4. Establish precise wage scales that reflect the responsibilities and requirements of each position, as well as attracting and motivating your employees.
  5. Maintain legislative compliance such as with minimum wage and vacation time requirements.
  6. Regularly review your benefits package and look for possible new opportunities for enhancing the choices you offer.
  7. Create a strong reward and recognition program, such as offering bonuses and profit sharing as part of a formal program and non-cash awards such as gift certificates, thank-you cards, and/or celebratory lunches as part of an informal program.

  8. Communicate, communicate, communicate. When it comes to your pay policies, ignorance is not bliss. Your employees want to know what factors determine their pay, what pay grade their job falls in to, when and how they will be eligible for raises and/or bonuses and what they need to do to move up within your organization. Share your compensation philosophy with your workforce and help them to understand how all of the elements of pay and benefits fit into your overall compensation strategy.
  9. Finally, be smart in how you communicate this vital information. Providing this information in a face-to-face setting, whether in a group or individually, is strongly preferred over receiving it in a memo or expecting employees to find this information in a policy manual or on your corporate Intranet. In a face-to-face environment, your employees are more likely to ask questions and get accurate answers and management can take that opportunity to reduce misunderstandings and fears.

Summing Up

Clearly, employee compensation is an art, not a science. If you link compensation to performance and conduct salary surveys to estimate what other employers are paying, you've taken some very important steps toward establishing an effective employee-compensation program. Since Compensation is one of Insightlink's "4Cs" of employee engagement, we are experts in assessing employee attitudes toward pay, benefits, reward and recognition. To learn more, please call 1-866-802-8095 ext. 705 or email

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Insightlink Communications are experts in employee survey design, data collection and analysis. Since 2001 we've helped companies of all sizes measure and improve their employee satisfaction and engagement.

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