Seven Steps to Successful Performance-Based Employee Rewards

Seven Steps to Successful Performance-Based Employee Rewards

By Don McDermott

dollarsCompany reliance on traditional merit increases to base pay as a way of rewarding strong employee performance has steadily eroded in recent years, largely because these programs have little or no direct tie to the bottom line. Today, companies are rapidly developing group award programs aimed at rewarding team, department or even company performance, or some combination of the three.

Fierce competition for talent in today’s labor market and candidates’ expectations for some form of an incentive opportunity have placed organizations without some type of performance-based rewards at a distinct disadvantage in recruiting and retaining key employees. As a result, many companies have shifted the focus of their pay philosophies to include incentives.

By taking a broader view of performance to include the aggregate results of a collection of individual efforts, organizations have been able to use incentive programs to translate business strategy down through the ranks. Effective use of incentives demonstrates that compensation programs are more than systems for rewarding employees competitively; they communicate management expectations by impacting individual paychecks.

Performance-based rewards can be powerful tools to affect and reinforce change in an organization. If what gets rewarded is indeed what gets done, companies need to make sure that their performance-based rewards programs are aligned with the overall business strategy. Any disconnect between the two may undermine a company’s ability to achieve its goals.

To prevent that, companies must understand the seven key steps to successful performance-based rewards programs:

  1. Develop clear expectations and articulate those expectations through clearly defined goals.
  2. Create a clear line of sight; employees must see that their direct efforts will impact the results that management wants.
  3. Set achievable goals. If the goals are such a stretch that most employees believe that they cannot be attained, the program is doomed from the outset.
  4. Establish a credible system that includes quantitative measures of results. If performance-based rewards are to succeed, participants must have faith in the fairness of the measurement system.
  5. Empower employees to achieve goals. Ensure the entire system is geared to maximum productivity, communication and cooperation.
  6. Make rewards meaningful. Performance-based rewards programs that provide marginal rewards-that is, less than 10% of base pay-are rarely motivational enough to change behavior.
  7. Make payouts immediate. Employees need to “feel” the impact of their efforts by quickly experiencing the results.

These seven steps should guide every performance-based rewards program. No matter what type of plan a company adopts, these steps must be completed and reviewed periodically to ensure that the program is achieving its objectives.

Editor’s note: This article is an excerpt of a case study that originally appeared on and was co-authored by Thomas J. Hackett. Click here to access the full case-study.

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