How to Build a Pay-for-Performance Model

One important component to building a competitive compensation plan is establishing a Pay-for-Performance model.

Here, I share why a Pay-for-Performance model might be useful for your organization, as well as some of the best practices you can use to create one.

Pay-for-Performance models move away from entitlements and signal a more mature and fair approach to compensation. They are one of the best tools for driving employee engagement, as well as boosting top talent retention. Despite the fact that this strategy is highly effective, few organizations have a feasible Pay-for-Performance model in place. Some are simply unsure about how to start, while others are concerned about the unintended consequences of a poorly-implemented program.

While Pay-for-Performance may seem like a challenging model to implement for some organizations, there are a number of ways to do it effectively. For most organizations, employee performance falls into one of two categories:

  1. Qualitative Performance – Activities directly related to customer experience and outcomes such as sales, customer satisfaction, customer retention, employee engagement/productivity, etc. Most of your sales, HR, and support personnel would fall into this category.
  2. Quantitative Performance – Activities related to the operations side of the organization such as programming, accounting, administrative, etc.

Once performance is quantified, it can be linked to rewards to create a fair and flexible Pay-for-Performance Model.  Some best practices of this process are:

  • Identify the triggers for top performers. What can truly drive motivation with these high-performing individuals? Not all employees view higher base pay (or even cash bonuses) as the ultimate form of reward. It is important for management to recognize what drives engagement and productivity for these employees so that some of the comp dollars can be allocated to these triggers appropriately.
  • Identify clear cut objectives for employees. Pay-for-Performance demands that the ‘what’ of performance be very clearly articulated so employees know what they are working towards.

The following is a summarized checklist of what is needed to set up Pay-for-Performance that works:

  • Clearly outlined performance category segmentation
  • Clearly defined job descriptions and goals
  • Clearly defined department and organizational goals (aligned with the employee goals)
  • Performance management system for tracking manager feedback/evaluations
  • Transparent goal tracking system for employees (view current results vs. goals)

Popular Short-Term Pay-for-Performance Plans:

  • Merit Pay
  • Lump-sum Bonuses
  • Individual Spot Awards
  • Individual Incentives

Some compensation components that you may choose to experiment with when structuring Pay-for-Performance models:

  • Base Compensation
  • Merit Pay
  • Equity
  • Special Recognition
  • Paid Time Off (PTO)
  • Opportunity Income (tuition, paid development)


Ultimately, your goal in developing your Pay-for-Performance plan should be to structure it in a way that rewards the employees who best contribute to your organizational and departmental goals. If you need assistance designing a compensation program that works for your company, you can view a brief demo for HRsoft’s COMPview software. It provides effective tools for busy managers so that your organization’s compensation plan can be error-free, secure, competitive, and reflective of your company values.


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