How to Create an Effective Pay for Performance Compensation Plan

pay for performance compensation

How to Create an Effective Pay for Performance Compensation Plan

Economic hardships have created a need for creative compensation approaches. One such approach is pay for performance compensation. When implemented properly, this plan shows employees that, despite tighter budgets and the disappearance of entitlement, dedication and high performance will still be rewarded.

Yet, at the WorldatWork Total Rewards Conference, senior VP for Sibson Consulting Jim Kochansky said that pay for performance compensation “is a concept embraced by many but executed poorly by most” (source: SHRM). Here’s what you can do to make sure you’re one of the organizations that executes it effectively:

  • Choose Your Variable Component
    Many pay for performance compensation plans are built by offering a base salary in addition to variable component (source: AccountingWEB). You might choose bonuses for employees who go above and beyond, gain sharing, or company equity.
  • Set Performance Standards
    By nature, a pay for performance plan isn’t equal, but it should still be both equitable and fair. In order to level the playing field, managers must clearly communicate performance standards for employees so they know exactly how they can go about improving performance and what’s expected of them. As such, implementing pay for performance compensation typically goes hand-in-hand with revamping your performance management
  • Make It Match Your Goals
    There are a few questions you can ask yourself in order to structure a plan that will work best for your organization. For instance, will the plan incentivize productivity or time and dedication? Does it aim to boost creativity or enforce company standards and protocol? Do company profits factor in, or will it reward individual effort regardless?
  • Develop A Foolproof Plan
    In order to have a plan that’s designed to be successful, you’ll need to cinch up all of the details. For instance, decide on thresholds, especially for standards that might be more difficult to measure, such as customer service. You must also determine who will be responsible for rolling the plan out, measuring ongoing performance, and how/when adjustments will be made to the plan, if needed.


Pay for performance compensation can be an extremely effective way to reward and retain high performers, but it can also go terribly wrong when approached incorrectly. Take the guesswork out of your compensation plan with a tool such as HRsoft’s COMPview software. Learn how to simplify and align your compensation planning system through an automated approach here.