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Intended to provide employees with motivation, performance related pay (PRP) is becoming an increasingly popular option for employee compensation. While there are advantages to implementing a PRP system, there are drawbacks as well, particularly when determining the compensation parameters. In addition, PRP plans can impact, both positively and negatively, a company’s ability to retain their top employees.
Let’s examine the many aspects of linking pay to performance.
Advantages of Performance Related Pay
There are several benefits associated with using a PRP system including:
• In most cases, it motivates employees to boost their productivity. It also gives them the ability to control their earnings. For dedicated employees, this is usually viewed as a bonus.
• It helps reach company goals, especially if there is a bonus involved as it encourages employees to focus on meeting numbers the company has set forth.
• It can help the company retain employees who prefer a PRP system. In most cases, these employees tend to be successful and put tremendous effort into what they do.
• It may draw new talented employees to the company. Again, those who are attracted to PRP have a tendency to work hard and exceed goals.
Disadvantages of Performance Related Pay
Conversely, there are also disadvantages associated with using a PRP system.
• It requires substantial effort on the employer’s part to create a system that is favourable to both the company and the employees.
• Determining the parameters may be time consuming. In addition, it is important to make certain that the reward amount is sufficient. If not, it will only discourage employees and leave them unmotivated.
• It can create discord among employees. If an employee feels favouritism is being shown to another staff member, it can create animosity.
•The system may result in employees being resistant to any changes made to current operating procedures.
Planning a Performance Related Pay System
For those looking to implement a PRP system, it is important to ask yourself several questions in the planning process:
1. Should employees be compensated for short-term as well as long-term performance? If so, you may want to opt for reasonable incentives for short-term performance, with higher incentives in the long-term.
2. Should employees receive bonuses based on the number of years they have been with the company? This encourages employees to stay with the company and improves retention rates.
3. Should special achievement bonuses be awarded? You may want to opt for a monetary award or some type of tangible reward such as a store or restaurant gift card.
4. How often should performance appraisals be completed? In most cases, this is done once or twice a year. Performance is assessed in reference to the agreed upon objective and performance standards determined in the last review.
5. How much or how little of an employee’s compensation should be based on their performance? Additionally, determine whether or not there will be an increase after a certain period of time.
Regardless of the exact parameters you decide to put in place, be sure that there are clear, measurable targets that are agreed upon by the employee and employer.
Using Performance Related Pay as a Method of Retaining Your Top Employees
There is no doubt that retaining the loyalty of your top performing sales reps can be very difficult. However, performance related pay can be very effective when looking to retain employees. You may want to reward employees with a bonus on their anniversaries. You may also want to increase incentives for the next year as a way to encourage company loyalty and increase performance.
Overall, choosing to put a performance related pay system into practice can prove to be very beneficial for companies, as long as parameters are clearly set. Although it does take significant effort to develop a system that benefits both the employer and the employee, PRP’s can be a mutual win in the long run.
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