Company leaders are pushing for better performance, and more and more are turning to incentive- and rewards-based pay to encourage their employees to go above and beyond. According to Deloitte's 2024 Global Human Capital Trends research, only 3% of business leaders say that their organization is extremely effective at capturing the value created by workers. Something is wrong there, and that needs to change. 

With pay-for-performance models, employee performance is directly linked to compensation, either in the form of merit pay increases or variable pay programs as commissions or bonuses on top of base pay. Some leaders see this model as an effective solution where you recognize every effort and achievement. Others worry it creates a competitive culture focused on competition and quantity, rather than team culture and quality output.

In this article, we'll explore the benefits and risks of performance-based pay to help you understand if it's right for your team.  

Benefits of Using Performance-Based Compensation

In the Alexander Group’s latest U.S. Sales Pulse Survey, 68% of executives said they aspire to have a “performance-based” sales culture. Performance-based compensation has clear advantages for employees and organizations alike.

Improves productivity

By directly linking compensation to individual performance, this compensation model incentivizes employees to work efficiently and effectively towards very specific outcomes and goals. Pay for performance encourages continuous improvement by recognizing strong work and rewarding successes that best align with your business objectives. 

{{multiplier-cta}}

Boosts motivation and morale

When employees are rewarded for their work, they become more motivated to work harder and hit performance metrics. With a pay-for-performance model, your employees essentially move into a motivation flywheel where improved performance gets rewarded with more money in the pockets, boosting employee engagement and morale.

Transparency also matters when it comes to encouraging performance: According to our latestthe State of Sales Compensation Report, 90% of sales reps and 92% of sales managers say clear visibility into compensation is key for motivation, aand yet only 26% of reps have a clear understanding of their payouts. 

Establishes high-performing company values

Creating a performance-based culture where high performance well-aligned with business objectives is valued and rewarded can help drive overall company success. You give employees a good understanding of how they contribute to overall company goals and reinforce the company's commitment to meritocracy and excellence to foster a culture of high performance and accountability. 

Empowers employees

When communicated well, performance-based compensation is very transparent in helping reps understand how they’ll get rewarded, and the milestones they need to exceed to earn more or be promoted to the next level. Along with regular performance evaluations and coaching, this gives them a sense of how they’re doing and encourages them to work harder and smarter. This level of transparency gives employees a greater sense of control over their earnings.

Helps with talent acquisition and employee retention

Competitive performance-related pay not only helps attract top talent to the organization, but also incentivizes employees to stay onboard and excel. By rewarding performance, employees are more likely to feel valued and appreciated. This makes them feel more engaged and satisfied with their jobs, resulting in lower turnover rates, reduced recruitment and training costs, and a more stable and productive workforce. 

Creates a culture of continuous improvement

Paying employees based on their accomplishments can create a culture where employees seek new opportunities to grow and contribute to the organization's success. It encourages employees to take initiative and proactively identify areas where they can make a positive impact. Performance-based compensation plans can be a powerful tool for creating a culture of growth, innovation, and success within the organization. 

Increases compensation flexibility

Performance-based compensations often involve variable pay structures, which give you the flexibility to adjust compensation based on business priorities and market conditions. This helps ensure that performance is directly tied to your company's objectives, and variable pay is tied to how well an individual helps you meet those objectives. 

Our State of Sales Compensation Report shows that sales managers want to be able to adjust compensation structure regularly: 85% said they'd like to adjust it quarterly or more frequently, and 95% want the flexibility to change plans to reflect shifting business dynamics. 

Pay for Performance Models: Potential Risks

Despite its numerous benefits, pay for performance is not without potential risks to look out for.

Negatively affects teamwork and company culture

An extreme emphasis on individual performance goals can lead to a competitive environment that undermines teamwork. The last thing you want is employees feeling like they're pitted against one another rather than working toward the collective success of the company. This type of organizational culture can erode the collaboration that most teams strive for. Instead of focusing on team goals, employees may be more driven to build their own skills and productivity. 

Focuses on quantity of work, not quality

When the incentive program is set up in a way that has employees focus too heavily on performance targets without any guardrails, they may prioritize quantity over quality. You risk emphasizing the need to hit targets, sacrificing long-term success for short-term gains. Ultimately, companies should emphasize the importance of both quality and quantity with performance-based models. 

Opens doors to subjectivity and biased decisions

Pay for performance can introduce bias and favoritism when it comes to compensation. By focusing on measurable and quantifiable metrics, you in turn deprioritize soft skills, like communication, teamwork, and creative thinking. This can hurt the company culture and make employees feel that they can't trust senior leadership. Consider discussing both soft and hard skills to build a more holistically-minded performance-based culture and take a more objective view. 

Increases employee stress and burnout

The pressure to meet performance targets can lead to employees feeling stressed and burnt out, both of which can negatively impact their well-being, productivity, and job satisfaction. According to Gallup's 2023 State of the Global Workplace report, 44% of employees said they experienced a lot of stress the previous day. Performance models can backfire on companies, even they’re implemented with positive intention. 

How to Decide If Pay for Performance is Right for Your Team

If you’re trying to decide whether to implement pay-for-performance compensation, carefully consider the pros and cons outlined above, as well as the following factors:

• Evaluate your company's culture and values: Decide if your company supports a performance-driven approach to compensation, and whether employees are receptive to individual performance incentives.
• Consider industry dynamics and market trends: Analyze industry benchmarks and market practices to get a good grasp of whether pay for performance compensation is feasible.
• Assess performance measurement capabilities: Take a hard look at your company's ability to measure and track individual performance effectively, as this is vital for performance-based pay.
• Align compensation strategy with business goals: Make sure your compensation strategy is in line with overarching business objectives to incentivize the right behaviors and outcomes.

By carefully weighing these considerations, you can determine whether pay for performance is the right fit for your team.

How CaptivateIQ Can Help Provide Transparency Into Pay and Performance

The most expensive sales line item for most organizations is compensation, but the team you build is single-handedly the most important resource your team invests in. That's why performance-based compensation is common: it rewards high-performing employees and ties individual performance to company success. 

Innovative technology can help your company future-proof revenue operations and turn compensation into a strategic lever for business growth. In fact, according to Deloitte's 2023 Global Human Capital Trends survey, 93% of business leaders think using technology to improve outcomes and performance is important for success – and yet only 22% feel equipped to realize those benefits.

CaptivateIQ helps businesses of all sizes make incentive compensation a strategic business driver, rather than an administrative burden. Reps get full clarity into their pay so they trust in their earnings, and understand how potential actions and deals impact their total earnings, offering direction for how to improve their own performance and contribute to the business' success.

Learn about how CaptivateIQ is using technology to more effectively motivate GTM (Go-to-Market) teams, and be sure to download our guide, The Secrets Behind a Successful Performance-based Culture: How to Build, Engage & Nurture a Winning Revenue Team, for even more on how to implement a successful pay-for-performance strategy.