Performance Management and Reviews

How performance-based incentives work

Performance-based compensation comes with unique benefits. Firstly, it is often a cause of great motivation for employees. With a clear line between effort and reward, it gets high productivity out of the workforce. It has positive knock-on effects throughout the company. For example, it can promote an efficient work environment, and promote positive competition. It makes compensation calculation easy to measure, and straightforward for employees to understand. It encourages a high performance, initiative-taking work culture.

However, performance-based compensation comes with clear negatives. If left unmonitored, the competition can easily become toxic. Instead of everyone doing better, it can result in the fragmentation of the workforce into separate silos. It can also propagate a decrease in overall quality. Crucially, in situations where metrics matter the most, work relationships suffer. Performance-based commissions work for certain personality types. Others will find the fluctuation of pay and constant evaluation of performance tiring. They will be liable to burn out.

These effects, both good and bad, compound with time. Take for example a situation where performance incentives are the norm. Hiring new employees with soft skills, leadership, or critical thinking will be less prevalent. These soft skills will have little value to success in the job. Their ability to hit targets will dictate their success. As a result, this can expose serious weaknesses in an organization with time.

While fair at its best, it can also be an unfair way of compensating employees. This is because the effort does not always align with the work put in. For example, success in commission-based work may have more to do with earlier networking skills. If someone in the same job is making twice the effort but receiving half the compensation, there is likely to be an unpleasant work environment.

How to make your strategy successful

Compensation based incentives do work. But to be successful, avoid these pitfalls:

1. Communication is critical. Make the rewards clear. Have a clear, fair process for awarding compensation. This increases the probability of success.
2. Be wary of the metrics used for measuring success. They will come at the exclusion of others.
3. Continually adjust your strategy in response to employee feedback.
4. Be fast to reward employees. If this is not possible, keep employees clearly updated on their compensation.
5. Be cautious when penalizing those that do not meet targets. This can have a severely detrimental effect on morale if done incorrectly. This makes it counterproductive.
6. Train managers carefully in how to manage performance bonuses. Communication must remain open and effective.

How to best conduct a performance appraisal

It is never the case that the efforts of each employee contribute equally to the company’s profits. There will be disproportionate skewing throughout the workforce. A small group of employees will account for the success. A small percentage of salespeople will close the biggest deals. There is often a high variance between the output and results of different employees.

Performance management can help to find the highest and lowest performers. With this knowledge, and how to you will be able adjust compensation accordingly. This makes it critical for companies to understand their workforce in detail.

Appraising performance enables you to compensate the highest performers for what they are worth. This keeps retainment high. For the lower performing employees, you can find the problems, affording you a chance to solve them. Appraisals give an opportunity to open a dialogue with the employee to better understand the job.

Performance appraisals are a way to keep a workforce functioning at maximum ability. They keep communication running in both directions. They reduce the barriers between the company and the employee. They are also important for goal setting, ensuring that employees understand their own progress. When done well, employees know that their compensation matches their contribution to the company’s success.

Performance appraisals serve other specific functions. Firstly, they set expectations for the company. This is important for the employees. Without a frame of reference, they will never know whether their work is good or not, or if their compensation is fair. The appraisals also influence compensation decisions. They will help decide when and where is best to provide the most effective support.

When doing an appraisal, focus on the successes as well as the shortcomings. Bring any relevant documentation to highlight your points, keep an open mind about how it is best to solve issues. Act on your findings and give feedback throughout the process. Lastly, remain consistent with appraisal criteria.

The different methods for performance appraisal

When conducting a performance appraisal, there are multiple methods to be aware of:

Objective based: This method puts the focus on specific goals. This makes measurement of success easy to measure. Ensure the goal is both simple and fair.

Comprehensive feedback: This considers feedback from all levels of the company to build up a comprehensive picture. While highly effective, there is significant work involved in gathering and presenting this data.

Points based: This method can be highly effective but requires a lengthy creation process. It will require multiple iterations before becoming the best it can be. Using an in-house points system to evaluate performance will require consistent maintenance and training.

How software helps performance management

Software is effective for managing the performance of large teams at the individual level. By having one centralized database of all things relating to compensation, you reduce the risk of errors. It streamlines progress and brings issues to your attention before they snowball into more serious problems. It keeps you aware of the top performers to ensure quick rewards. This boosts morale and motivates them to continue.

This software also does monotonous tasks, leaving HR managers to do more meaningful work.

Dedicated software also promotes communication across the organization. It breaks down the silos that can occur if left unchecked. It helps to build skills and develop the workforce. Skill development, more easily done via software, helps motivate underperformers. It keeps the workforce engaged. It lets employees know that their work is relevant.

There is one ultimate goal of appraising performance, and of offering performance-based incentives. That is to have the compensation aligned with the results an employee generates. This is internal equity.