Implementing Pay for Performance: Our Top Tips

In times of reduced budgets and increased competition, more companies are turning to a pay-for-performance strategy. Pay for performance helps allocate limited funds by giving higher pay increases (such as salaries, bonuses, or equity) to high performers, while rewarding lower increases or less compensation to low performers. This strategy contrasts the “peanut butter” approach, where increases are spread evenly across the organization. 

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Even though pay for performance is on the rise, managing this organizational shift can present a challenge for compensation teams. Keep reading to learn best practices for implementing pay for performance successfully.

1. Be Transparent With Candidates 

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Building a culture that embraces and understands the ins and outs of pay for performance begins during candidate conversations. 

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It’s critical to align your compensation, communication, and recruiting teams to ensure potential employees understand how they will be compensated, with regard to cash, equity, and bonuses. 

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As a compensation leader, it’s helpful to meet with your talent acquisition team once a quarter to review your compensation philosophy. It may be repetitive to those who have been at the organization for a while, but overcommunication is better than confusion. 

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Recruiters should be prepared to share compensation philosophy and merit cycle parameters so candidates understand how their goals are tied to compensation. 

2. Educate Employees on Pay for Performance 

Here are some tips on how to discuss pay for performance with people managers and individual contributors.

People managers

• Prepare managers for upcoming merit cycles: Provide managers with playbooks to guide them in delivering raises and handling conversations with employees who will not be receiving a compensation increase. Anticipate possible employee pushback and share resources to help managers get ahead of tricky situations.
  
• Give your team discretion: Share recommended merit increase guidelines, but enable managers to go outside those guidelines, when necessary. Managers should be prepared to defend their decisions if they provide raises outside the suggested parameters. 

Individual contributors 

• Explain the why behind the shift: Moving from a “peanut butter” compensation approach to a pay-for-performance strategy is a significant change, so it’s likely that employees are going to have questions. Be prepared to clearly articulate and educate employees on why there is a change and what the change means for them. ‍
• Don’t beat around the bush: Align with key stakeholders before rolling out your messaging to the broader organization. Your employees will lose trust if your presentation of pay for performance is fluffy or confusing. ‍
• Be transparent: Clearly define employee goals and timelines so there are no surprises come merit cycle season. Transparency also boosts trust and increases motivation. Evan Salisbury, Head of Total Rewards at Ancestry, recommends creating an internal intranet so employees can always access in-depth compensation information. 

“A comprehensive intranet page will pay dividends over time as you get employee questions and can point them to a resource you’ve already created.”
– Evan Salisbury, Head of Total Rewards, Ancestry

• Outline how different levers affect pay: Pay for performance isn’t always black and white. There are multiple layers that determine an employee’s cash compensation, bonus, and equity. Share other considerations around pay for performance considerations, like when they last got promoted and where they currently sit within their salary range.

Regardless of who you’re speaking with, don’t forget to be intentional about the terminology you’re using. Be deliberate when you discuss topics like “equity” and “fairness.” 

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3. Measure Success

The final piece of the puzzle is assessing if your compensation efforts have paid off, but doing so isn’t always straightforward. It’s helpful to consider a combination of factors to paint the broader picture.

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Low attrition rate is often an indicator of success, but it isn’t a perfect measure. You also want to consider who is leaving the organization. Whether you have a low or high attrition rate, you don’t want to lose high performers.

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It’s also important to consider employee engagement stats and pulse surveys. Employee sentiment helps you assess if your employees understand and believe in the pay-for-performance strategy. 

Communicate Pay-for-Performance Details With Pave

An effective pay-for-performance strategy hinges on clear and detailed communication. With a deeper understanding of the ins and outs of their compensation plans, employees will feel more bought in and motivated to help move the business forward.

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Pave’s compensation management software helps teams streamline communication. With Pave, you can easily share total rewards package details with employees and create visual offer letters for candidates. 

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‍Get a demo of Pave and take your compensation communication strategy to the next level.

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