What is Pay for Performance & Why Is It Trending Among Comp Leaders?

Note: This article was originally published in October 2024. It has been updated as of March 2026.

Pay for performance is a hot topic in the compensation space. As companies tighten budgets, compensation leaders have to pull whatever levers they can to be able to hire top talent and retain their best performers. But implementing a new compensation philosophy is no small task.

Here, we’ll cover what is pay for performance, why it matters, and some key considerations to think through if you want to create a performance-based pay strategy for your business.

The Background on Pay for Performance

When it comes to salary raises and equity refreshes, it used to be common for companies to take the “peanut butter approach” and spread the budget around equally to all their employees. This approach is appealing: it’s easy, satisfying, and feels fair. And a lot of companies could afford to do it.

Cut to today, and the macroeconomic landscape has changed. Companies are dealing with factors like inflation and economic uncertainty, and many are struggling to grow. That means budgets for raises are tighter, and equity burn is a bigger concern. Taking the peanut butter approach is harder to do in the current business climate.

These factors and the pressure they create has led to a growing trend in pay for performance.

What is pay for performance?

Compared to the peanut butter approach, pay for performance is more targeted. It involves incorporating your merit cycle and performance ratings into your compensation strategy in order to reward high performers with higher compensation than lower performers. This could come in the form of salary increases or raises, bonuses, or employee equity.

When companies use a performance rating, the scale will typically include rankings like “below expectations”,  “meets expectations”, and “exceeds expectations”. Pave Data shows that many companies use some type of scale to rate employee performance during the merit cycle, and that the number of ratings tends to increase as organizations grow in headcount and complexity.

In a pay-for-performance model, these merit cycle ratings would be mapped to the raises, bonuses, or equity grants outlined in the compensation strategy. According to Pave data, employees who receive higher performance ratings are more likely to receive a pay increase.

For more insights on merit cycles, download Pave's free Merit Cycle State of the Union report.

Why Pay for Performance Matters

Pay for performance helps compensation leaders allocate limited budgets more intentionally. When fewer dollars are available, directing them toward the employees who drive the most impact is often a more defensible use of spend.

Key benefits of pay for performance include:

• More efficient use of compensation budgets
• Stronger retention of high performers and critical roles
• Clearer differentiation between performance levels
• Greater alignment between impact and rewards
• Improved employee perception of fairness

At Pave’s 2024 Total Rewards Live event, Michael Ng, VP of Total Rewards at Stitch Fix, highlighted the importance of distinguishing between equality and fairness:

“The words ‘equal’, ‘equitable’, and ‘fair’ are often used interchangeably, when we all know that there are nuanced but important differences. ‘Equal’ quite literally means ‘the same.’ To pay fairly, people who go over and above should receive more, while those who lack motivation and miss goals should receive less. To pay fairly, we must differentiate pay. This is the essence of pay for performance.”

When employees understand how compensation decisions are made—and see that strong performance is rewarded—they are more likely to trust the system and stay engaged.

It’s also important to note that pay for performance is not limited to cash. Equity is another lever compensation leaders can use to reward sustained impact while managing long-term equity burn.

Pave Founder & CEO Matt Schulman posted about pay-for-performance culture on LinkedIn—see what the community had to say.

Types of Pay for Performance Models

Pay for performance can look different depending on company size, industry, and compensation philosophy. Most organizations use a combination of models rather than a single approach.

Merit-based salary increases

Merit-based increases tie annual raises directly to performance ratings. Higher-performing employees receive larger increases, while lower performers receive smaller or no increases.

Bonus-driven performance pay

Bonuses provide flexibility by rewarding short-term performance without permanently increasing base pay. These bonuses may be individual, team-based, or company-wide.

Sales incentive plans

Sales roles often use commission or incentive structures that directly link compensation to revenue outcomes. These are among the most explicit pay-for-performance examples.

Equity-based performance rewards

Equity grants or refreshes may be awarded based on sustained performance, role criticality, or long-term value creation.

Team-based vs individual-based models

Some organizations reward performance at the team level to encourage collaboration, while others emphasize individual contribution. Many blend both approaches.

Benchmarking Pay for Performance

Despite the growing emphasis on pay transparency and equity, many organizations struggle to implement true pay for performance cultures. According to Pave’s benchmarks, the market medians Q1 of 2024 showed that:

• The vast majority (87%) of eligible employees received a raise
• The difference in raise percentage between promoted and non-promoted employees is only 5.2% (9.2% vs. 4.0%)

This raises questions about whether current compensation practices truly reward high performers. In many organizations, top performers might be 2x, 3x, or even 10x more impactful than the bottom quartile of employees. Yet, the compensation treatment shows only a 5.2% preference for top performers rather than 100%, 200%, or 1000%.

Implementing a Pay-for-performance Culture

To create a genuine pay-for-performance culture without increasing the overall merit cycle budget, companies may want to consider more drastic measures:

1. Limit raises to fewer employees, allowing for larger increases for top performers.
2. Increase the average raise for promoted or top-performing employees beyond 9.2%.
3. Implement minimal or no raises for low performers.

For example:

• Reduce the percentage of employees receiving raises from 87% to a lower figure.
• Increase the average raise for promoted or top-performing employees to significantly more than 9.2%.
• Set the average raise for low performers at or close to 0%.

However, these approaches come with their own set of challenges and cultural implications. Organizations must carefully weigh the trade-offs between strict pay-for-performance models and broader pay equity goals.

When implementing these changes, consider the following steps:

1. Analyze your current merit cycle data
2. Compare your figures to industry benchmarks
3. Determine how much you want to shift towards a pay-for-performance model
4. Develop a strategy for reallocating your merit cycle budget
5. Communicate changes clearly to managers and employees
6. Monitor the impact on employee satisfaction and performance

Support Your Comp Strategy with Pave

Pay for performance is gaining traction in the current market landscape. If you’re interested in implementing a pay-for-performance model, or evolving the version you already have, Pave can help. 

Pave Market Pricing can help you improve your compensation strategy by putting benchmarks into action and updating comp bands. In addition, leverage Pave’s Compensation Planning tools to run your merit cycle and align it with your comp workflows, all in one tool.

Ready to learn more? Request a demo today.