To be effective, every performance-based pay system must encompass a few key elements.

These include clear objectives, a thorough performance process, and a tool to support your pay-for-performance initiatives.

Learn more about each of these critical components and additional guidelines for success below.

Effective, Understandable Objectives

Employee objectives should be clearly defined and support the behaviors you want to encourage. They should also be measurable. For instance, client retention could be an important metric to your company. Which leading behaviors would you want to see people working towards to support better client retention? Improved service could be an example, but make sure you’re focusing on metrics for which you can hold people accountable.

Performance Process

The performance process should span the entire year and define clear roles for the employee and manager. Both parties should know what’s expected of them in terms of tracking performance and meeting to discuss performance. Conversations should take place regularly, so that by the time a formal evaluation approaches, the review is a recap of what’s been discussed throughout the year.

A Tool to Support Pay-for-Performance

The tool you use to track performance could be custom or off-the-shelf. Most importantly, choose a solution that isn’t overly complicated and is user-friendly so your managers will actually take advantage of it. The tool should simplify performance management, but not be used as a substitute for holding performance-related conversations.

Understanding Equity

In addition to the components listed above, it’s also important that your performance-based pay plan is equitable. To have equity in your plan, you must:

  • Have alignment between results delivered and pay
  • Ensure employees have the same opportunity for rewards in the performance plan (though this does not mean that everyone gets paid the same)
  • Give employees the opportunity to truly influence the results delivered
  • Use comp ratio to determine appropriate pay based on marketplace conditions and employee performance

Comp Ratio

Comp ratio is a process in which an organization uses market data to measure how far off their pay is from market-based pay levels. This information, combined with performance level, can be used to determine salary increases. It is a simple yet effective way to manage compensation relative to performance.

Setting Goals

Another crucial component of any successful performance-based pay system is clear goal setting. In order to judge employees’ performance, you must be using clear and measurable goals. For this reason, SMART goal setting is recommended. Here is a brief guide on SMART goals:

  • Specific: What do you want to do?
  • Measurable: How will you know when you’ve achieved it?
  • Achievable: Is it in your power to accomplish it?
  • Realistic: Can you realistically achieve it?
  • Timely: When exactly do you want to accomplish it?

Here’s an example of how SMART goal setting could be applied in a customer service role.

  • Specific: How many calls the employee fields
  • Measurable: Simple count/number of calls
  • Achievable: Typical worker will field 10 calls
  • Relevant: Number of calls has a direct impact on the company’s bottom line
  • Time-based: Calls measured on a daily basis (10 per day)