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Why to Prefer Performance-Based Compensation?

HR Tech Outlook | Monday, August 30, 2021

A company can quickly identify top-performing employees by implementing a performance-based pay system. One can also zero in on employees who aren't contributing as much to the company.

Fremont, CA: Most of us are familiar with the concept of performance-based pay. People grew up competing in spelling bees, sports, and challenging our peers - there was always a winner. People applied this philosophy to other aspects of their lives, pursuing academic and professional goals. It has been instilled in people employees that those who work hard deserve to be recognized and rewarded.

Isn't it pretty black and white? However, performance-based pay is not as simple as awarding a trophy to the competition winner; performance-based compensation has both advantages and disadvantages. Understanding them can help one decide whether or not to implement a merit-based pay system in one's company.

Advantages of performance-based pay:

Recognize Areas for Improvement

A company can quickly identify top-performing employees by implementing a performance-based pay system. One can also zero in on employees who aren't contributing as much to the company. Putting a monetary value on an employee's contributions can assist one in determining the reasons for varying performance levels.

An ineffective training process, a lack of accountability, and miscommunication from superiors about job expectations are all examples of low-performance factors. Companies that use performance-based pay can identify areas for improvement in their operations. Offering performance-based pay raises allows one to focus on individuals who require more guidance and strategize on change.

Incorporating performance appraisals into one's merit-based compensation plan is another tool to recognize areas for improvement. Performance evaluations can be done yearly, semi-annually, or even quarterly. They offer an excellent opportunity to discuss individual performance with employees and develop a customized growth plan. The program financially rewards the employee as they meet their performance goals.

Improved Recruiting

Companies can improve their recruiting processes if they can identify those employees who perform better. Instead of vetting and hiring employees who may not contribute to the organization, they can use data from their top performers to hire candidates who share similar characteristics, goals, and personalities.

By recruiting top candidates from the start, this assessment process can save companies time and money. Streamlining the recruiting process and hiring people who are a good fit on a consistent basis will reduce turnover costs.

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