Performance-Based Compensation is Alive and Thriving!

Organizations are dealing with the rising cost of health care, the general increased cost of goods and services year over year and the expected increase in taxes to cover this country’s government debt. These costs are causing organizations to review their largest expense which is employee pay. Management must determine how to keep their employee base motivated and, at the same time, ensure every cent paid is returning the desired results that keep the business going and growing.

We believe that organizations are starting to wake up and understand that positive performance results merit adjustments in pay and not just “butts in seats or foots on floors.” With the average budgeted salary adjustment for 2014 expected to be around 3%, it doesn’t make good sense to provide across the board increases to all employees. Given that employees are generally paid a market level pay or something more or less depending on the organization’s compensation and benefits philosophy statement, increases in pay should only be given based on what the employee accomplished that truly made a bottom line difference for the company. Differentials in pay means that organizations need to have an effective performance appraisal program in place with proper training provided to all leadership that conduct the evaluations and a solid performance appraisal form. Each performance rating on the form needs written justification that should come from good notes made by the supervisor throughout the year where the employee performed above or below the expectations for that year. The HR department should return forms that are not fully completed or where the supervisor just quickly marked the employee’s performance levels and no thought or effort was taken.

In the most recent Northwest Arkansas Human Resources Association and Arkansas Compensation Association salary and benefits surveys, the number of organizations providing cost of living adjustments to their employees dropped to almost zero. We believe that organizations should pay its employees based on the each position’s internal value to the organization, the market value of the positions and the performance, and the experience and education that each employee brings and utilizes at their respective organizations.

Companies need cash flow to operate and reinvest for growth and can’t afford to pay its employees based on attendance. Performance-based compensation backed up with an effective performance management program should create the proper motivation to drive the development of the employees to higher performance levels and generate the necessary ROI/ROE to sustain the organization year over year.