June 4, 2020  
 
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Pay for Performance Compensation Plans

Written by Stefan Martinovic for Gaebler Ventures

Pay for performance compensation plans are win-win for employees and business owners. When pay for performance salaries are properly implemented, everyone shares a common goal of doing what's best for the company.

In addition to traditional wage and salary based compensation systems, basing an employee's pay on their performance has also become popular.
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Pay for performance, or P4P is a system in which employees attain increased levels of compensation if their team, department, or company reaches specified targets. P4P has been implemented as a motivational tactic and with an eye to persuade employees to work harder and benefit the company while at the same time providing an added benefit for themselves.

As of 2005, approximately 75 percent of all businesses linked at least some part of employee pay to performance.

Pay for performance compensation schemes initially gained popularity in health insurance, rewarding different medical entities for reaching targets in quality and efficiency. It was widely held that the implementation of this system would improve the quality of care administered and bring the United States' healthcare system on par with some of the more venerable international systems. The applications for P4P systems have recently extended far beyond the realm of healthcare, as employers in many different industries are recognizing its merits.

Pay for performance compensation structures not only account for individual, but also account for the working environment and performance of the team as well. This can be a valuable benefit, as knowing that compensation increases will be based on the performance of the team will coerce employees to operate as a cohesive unit in order to reach a common goal.

Typically, employers not on P4P systems hold compensation reviews, or simply provide their employees with a set pay increase annually. When holding P4P performance reviews to determine compensation bonuses, you must ensure that you can consistently and accurately measure performance for all employees.

These measures may be different for people in different positions within the same company. Performance metrics for a secretary will certainly be different for those of a financial analyst. By surveying the responsibilities of people occupying various roles in your company, you can effectively formulate performance metrics on which your P4P system will be based.

If a pay for performance compensation structure would help to benefit your business, make sure to review the details of the system with your employees and establish guidelines for compensation. By having a well-established policy in place, you can be sure that all of your employees have a firm grasp of how the P4P system works, which will allow you to get the most out of your employees.

Stefan Martinovic has an extensive body of work across the financial services, manufacturing, and retail industries. He is currently pursuing an MBA in Management and Entrepreneurship at The College of William & Mary.

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