The Pros and Cons of Paying for Performance

There's a lot of talk these days about paying for performance in the workplace. Some people are convinced that it's the only way to go — and with the current labor shortage, there's a lot of pressure on blue collar employers to start using this type of compensation system.

So, which is it? Is performance-based pay a good thing or a bad thing? Let's take a look at the pros and cons of this controversial topic.

What Is a Pay for Performance Model?

In manufacturing, construction, and other blue-collar industries, business owners are actively looking for ways to improve employee productivity and boost retention. In many cases, they're turning to a new compensation philosophy in an effort to incentivize their deskless workforce.

Incentive pay, variable pay or performance-related pay are all terms used to describe the same type of compensation system — compensation that is directly tied to an employee's performance.

The most common performance metrics are:

• Productivity
• Quality of work
• Sales

And while it's not unusual for businesses to offer bonuses or other types of rewards for exceptional performance, these variable pay programs are different in that they make employee compensation directly contingent on meeting specific performance goals.

In construction, for example, an employer might pay a project manager their base rate, plus a bonus for every project that exceeds a certain gross profit margin.

An assembly line worker in manufacturing might be on a piece-rate pay system, where they get paid based on the number of widgets they produce that meet quality standards.

And an estimator at a home services company might receive a sales commission for every job they land that's over a certain dollar amount.

While the specifics of these plans vary, the pay philosophy typically involves setting a certain target level of performance and then providing employees with a bonus or other financial incentive if they reach or exceed that level.

The Benefits of Paying for Performance

One of the biggest problems blue-collar businesses are facing right now is the labor shortage. Finding, hiring and retaining skilled employees is a challenge, as you know. So performance-based pay could be the answer.

Money is a powerful motivator. If you want to attract and retain the best workers, you need to offer them a compensation package that's extremely competitive.

And that's what makes this compensation model so attractive to candidates — it offers them the opportunity to earn more money than they would under a traditional salary or hourly wage. Their income is completely dependent on their own performance, which gives them a lot of control over how much they make.

And tying compensation directly to your revenue makes employees feel they have a vested interest in the success of your company. High performing employees will be motivated to do whatever it takes to help you reach your goals, whether that means putting in extra hours, taking on more responsibility, or finding new and innovative ways to increase productivity.

Offering these financial incentives gives you the opportunity to reward top performers. If someone goes above and beyond, they should be compensated for it. A pay for performance program makes that possible.

You can see there are some definite benefits to a pay for performance model! But that's not to say there aren't any challenges associated with this type of system. Let's take a look at some of the potential "cons" now.

The Downsides of Performance-Based Pay

While there are definitely advantages to paying for performance, there are also some potential drawbacks that business owners in construction, manufacturing, home services and other trades need to be aware of.

First and foremost, if not managed correctly, a pay-for-performance system can create a hostile work environment. A recent study showed that 85% of people feel that micromanagement negatively impacts morale in the workplace, and 75% said that it affects their performance. If employees feel like they're constantly being watched and evaluated, then the results are counterproductive to the goal in the first place — better performance!

Individual incentive bonuses can also pit employees against each other, rather than working together as a team. This can lead to conflict, rather than cooperation and collaboration. Although, team incentive bonuses can help mitigate this issue.

Another potential problem is that if employees are only focused on meeting their performance targets, it could come at the expense of other important factors, such as quality or customer service. They might cut corners, use manipulative sales tactics, or take shortcuts just to meet quotas. That can result in a decline in the quality of your product or customer experience, which is obviously something you want to avoid.

These are all valid concerns that need to be considered before implementing a performance-based pay structure.

Should Blue Collar Industries Implement Variable Pay?

The answer to this question is not a simple yes or no. Deciding to implement variable pay depends on your specific business goals and objectives.

If you're struggling to attract and retain good workers, then a pay for performance plan could be exactly what you need to give your business a competitive edge.

But, as we've seen, there are some challenges associated with this type of system. So it's important to do your homework and develop a plan that takes all of these potential problems into account. Ask yourself:

• How will you manage employee stress levels and morale?
• What kind of impact will it have on team dynamics?
• What steps will you take to ensure quality remains a priority?

If you can answer these questions and develop a plan to address any potential problems, then you're well on your way to making a pay-for-performance system work for your business.

How to Manage Employee Performance

If you decide to implement a pay-for-performance system, there are some steps you can take to ensure it's successful:

Step 1: Choose measurable business objectives

Having tangible metrics that you can track is essential for any business, but it's especially important when you're tying employee compensation to performance.

Employees need to have a clear understanding of what they need to do to earn a bonus. Otherwise, it will be impossible to fairly evaluate their performance. This could be things like increased sales, improved customer satisfaction scores or reduced costs.

Step 2: Set realistic goals

If you set unrealistic performance targets, employees will either get frustrated and quit, or they'll take shortcuts to meet quotas. Neither of these outcomes is desirable. So, it's important to set achievable, yet challenging, goals.

Step 3: Evaluate employees regularly

You can't manage what you can't measure, so you need to monitor employee performance on a regular basis. This will help you identify any problems with your compensation method early on and make adjustments to the system as needed.

Regular performance reviews with each individual gives you an opportunity to:

• Provide feedback
• Discuss any concerns
• Give guidance on how to reach their goals
• Identify training opportunities
• Keep everyone on the same page

Step 4: Get input from employees

Before you roll out a new variable pay program, get input from employees. They're the ones who will be affected by the change, so it's important to involve them in the decision-making process.

Consider all of the potential challenges and pitfalls and develop a strategy to address them. With careful planning and execution, you can make performance pay a powerful tool for attracting more candidates and keeping top talent.

And if you're ready to add to your workforce, Team Engine is the most efficient way to promote your job openings, screen candidates and track your hiring progress. Our software is designed specifically for blue-collar businesses and can help you attract, hire and retain the skilled workers you need to stay competitive.