Performance-based pay is an increasingly popular method for structuring an employee’s pay. In fact, Salary.com reports that nearly 75% of organization incorporate a pay-for-performance philosophy as part of their overall compensation philosophy – and for good reason. There is solid evidence that suggests performance-based pay can make a substantial impact on how well your team performs.
One such study conducted by IZA World of Labor, found that performance-based pay is linked to increased worker motivation, effort, and loyalty, as well as an increase in job satisfaction.
What is Performance-Based Pay?
Performance-based pay is a compensation strategy where employees are rewarded based on their job performance and contributions to the organization. This can mean a lot of different things for a lot of different organizations, and even within a single organization the standards may be applied differently across different departments, but it all boils down to increased performance equals increased pay.
While performance-based pay can be utilized more broadly among any type of employee by way of providing annual merit increases based on an individual performance, it is often the foundation to the entire pay structure for a sales team. Aside from annual merit increases, many of the other components of performance-based pay: commissions, bonuses, and other incentives, are often the bread and butter behind a sales rep’s paycheck.
Why Do Companies Implement Performance-Based Pay?
The motivation behind structuring an employee’s earnings around performance-based pay is to actually motivate the employee themselves. It essentially gives employees control over their income, making them more likely to go the extra mile so they can unlock as many additional earning opportunities as they can. Additionally, it keeps employees consistently engaged with how they are performing because their income reflects their overall performance. They are able to easily measure up how they’re doing against what is expected of them.
Tips for a Performance-Based Pay Plan that Motivates
IZA’s study, mentioned above, regarding the effects of performance-based pay on an organization’s workforce looks promising, but the study also noted key downfalls to how a poorly structured performance-based pay plan can have the opposite effect. For example, if a specific performance metric is difficult to measure or if goals are unrealistic in terms of achievability, it can actually be demotivating for staff.
Here are best practices for implementing performance-based pay for sales reps:
- Have Clearly Defined Objectives: Performance-based pay is most effective when implemented with a criteria that includes specific benchmarks or goals. Similar to any sales compensation plan, sales reps need clear guidelines to understand what they need to accomplish in order to attain their desired incentives.
- Be Transparent & Communicate: If there’s any ‘fine print’ involved in your pay structure, your employees need to be well aware of this. There shouldn’t be any surprises to your sales reps, especially in a situation where they believe they have met the criteria necessary to earn an incentive. The structure needs to be adequately communicated to team members and visible so your team can easily reference it at any point. Failure to communicate the structure of your plan can be frustrating and demotivating to reps.
- Set Attainable Goals: The goals and metrics used to gauge your sales rep’s performance should be properly vetted to ensure performance goals are attainable. A key component of an ineffective performance pay plan is having goals that are impossible for your staff to reach – or require an unreasonable amount of effort to attain.
- Provide Motivating Incentives: Obviously, the crucial motivating factor for employees on a performance-based pay plan is having attractive incentives. If your incentives are not commensurate with the effort required to meet the outlined goals, your team is going to immediately lose interest. Not only should your incentives be commensurate with the effort needed, they need to be something that your team will actually find desirable and work hard to earn.
- Be Flexible & Open to Feedback: Organization goals are constantly changing, consumer behavior evolves, and certain products or services may become outdated over time. An important part of working in sales is being agile to changing needs and adapting to overcome new obstacles as they arise. When changes like this occur, it’s important to re-evaluate your pay structures to make sure they are appropriate. Being receptive to feedback from your team is a big part of this. They are the ones out in the field and may be the first to notice changing trends.
Automate & Track Performance-Based Pay
As mentioned above, the most successful outcomes of performance-based pay come from organizations that have clear objectives and goals for their team members. This means that to effectively and accurately monitor how your employees line up with these goals, you need a solution that provides dynamic tracking, automated pay calculations, and complete visibility for your sales team.
Core Commissions provides all these features plus off-the-shelf reporting options, drag-and-drop analytics, and unlimited integration options, so you can easily connect to your HR or CRM platforms.
Contact us or schedule a demo to see how Core’s platform can not only accurately automate the calculation of your performance-based pay plans, but provide a detailed record of each employee’s earnings, so both you and your employee can track trends in their performance over any designated time period.