05 Feb How to Work Pay for Performance Into Your Compensation Planning Process Alongside Market Data
Nowadays, most organizations use compensation planning as a means to drive performance. Taking a pay-for-performance approach to compensations allows companies to link pay to employees’ quality of work. While pay for performance is among the most standard principles in compensation planning, it can be challenging to know how to balance performance with market data to make the best possible pay decisions for each employee. Here, we break down the steps to help you navigate the process with ease.
Start With Salary Ranges
Before you can factor in performance to your pay decisions, you must first develop salary ranges for each position. You can do this by gathering market data from three to four sources. Then, create salary ranges based on your findings, also taking into consideration internal factors, such as your company’s pay philosophy and the positions with the highest level of demand.
Then, Tie Pay to Performance
Once you have salary ranges, break them up into three sections: minimum, midpoint (market value), and maximum. From there, you can begin to assess where employees should be paid based on their performance levels. For sustained high performance, employers should consider paying people above market level. Employees who are meeting expectations can be paid in the midpoint category, while employees who are developing in their roles or failing to meet expectations can be paid in the lowest tier. Of course, time also plays a critical role in any performance-based pay decisions you make. The key term here is “sustained” performance – whether that’s high or low.
Taking this strategic approach to compensation will not only help you control labor costs, but it will also allow you to pay competitively. Most importantly, it will also aid in incentivizing sustained high performance, thereby encouraging your top contributors to continue excelling and motivating lower-ranking employees to pursue improvement.
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