If your small business is like most, you probably wish you could give your employees pay raises right now. They’re been working hard for you over the past few years of the recession, doing more with less. But committing to a permanent pay raise can be risky in today’s economy. What’s a small business to do?
One option is to institute a pay-for-performance plan. MarketWatch recently reported that pay-for-performance is a growing trend, citing HR consultancy Aon Hewitt’s prediction that spending on “variable pay” next year will be 11.8 percent to 11.9 percent of total salaries, compared with 11.8 percent this year. The 11.8 percent figure is the second highest rate since Aon Hewitt began measuring this figure in 1976.
Pay-for-performance has some obvious advantages for the small business owner. First, a good pay-for-performance plan will focus on the aspects of employee performance that increase sales and profits. As a result, there will be more money available to pay the employees for their performance. No money? No problem—you don't have to pay the employees that extra bonus.
While many workers would prefer the stability of a salary increase to the riskier pay-for-performance model, there are plenty of people who welcome the chance to earn more by performing better. Younger employees, experienced employees and men are all more likely to embrace incentive pay plans, according to one expert cited by MarketWatch.
If you’re considering creating a pay-for-performance plan in your own business, how should you go about it? It’s best not to cut employees’ base salaries, unless you’re dealing with salespeople who are used to having part of their compensation tied to performance. Instead, consider how much of a raise you would normally give an employee and figure out how to tie that amount to performance.
You’ll also need to decide whether you want individual or group incentives, or a combination of both. You could tie employees’ bonuses to their department or team’s performance or to their individual performance. You can also tie rewards to the entire company’s performance, such as by offering a profit-sharing plan.
There are pros and cons to each of these methods. While setting individual goals for each employee is more time-consuming, it can also be more motivating because employees can work toward the goals without having to rely on others. Setting group goals for departments or teams can motivate teamwork, but can also backfire with employees blaming each other for failure to reach the goals or accusing others of not pulling their weight. You’ll have to decide what will work best for your company and the personalities involved.
Set measurable, understandable goals that are clearly tied to achieving financial results, such as more leads, more sales, higher productivity or greater customer satisfaction. Communicate those goals and make sure each employee understands what he or she is required to do to earn the performance-based pay. Create a document each employee can sign so there’s no misunderstanding.
It’s a good idea to work on your performance-based pay plan with two other people: your accountant, who can help you make sure the goals you are setting will produce the desired income to pay the workers; and your attorney, who can make sure your plan is not running afoul of any employment laws.
In today’s fast-changing business world, paying for results once a year isn’t often enough. You’ll get better results if you evaluate performance quarterly and pay out bonuses then.
When handled properly, a pay-for-performance program can motivate employees to new heights—and propel your business to new heights of success.