Is Performance-Based Compensation Really Better? Let's Discuss Its Impact on Employee Satisfaction

Compensation Planning: Mitigating Risks

The compensation planning involves mitigating the risks which might surface. A fear of backlash from 'performance-based' compensation has always topped the chart. The forced ranking and bell curve have shown over the years how it dissatisfies employees.

Research Supporting Performance-Based Compensation

Contrary to this conventional wisdom, here's a research paper that proves why and how performance-based compensation works better! Ian Larkin (Harvard University) and Stephen Leider (University of Michigan) emphasized that over-confident employees with a high self-image would opt for bonus plans where they can decide on the amount through performance. This adds to their self-efficacy, hence it is always the preferred plan for them. Sales and marketing are the two verticals that opt for this.

Personal View on Compensation Plans

My view is that it all depends on the job and the motivation derived from it! When an employee is aware of an unlimited target that is achievable, they would go for performance-based compensation. Whereas, an employee who has a limited work area or an unachievable target would opt for higher fixed components.

Please share your views.

Leaving Money on the Table

I partially agree with the point given. You may implement it for the sales team as their outcome is visible, but what about the backend people, like HR, Finance, Admin, and Security? These departments can be measured but not on the basis of data as they are not figure-oriented departments. If you want to evaluate performance, there would be some other tools.

I tried a lot in my last organization to implement performance-linked bonuses, but every time I was stuck at the back office. To motivate individuals, money is not the only factor; there are other non-monetary factors as well through which individuals can be highly motivated.

What do you say about it?

Thanks!

Deepak