Designing performance based pay strategies for a high performance culture

Performance is at the heart of business success, and is held together by various employment dynamics. In Employment Hero's recent Wellness at Work report, we found that the majority of employees indicated that financial stress and the cost of living was by far the main source of stress in the last 3 months. In fact, 85% are experiencing stress at least a few times a month or more.

Many things can impact your team when it comes to workplace discontent. It might be burnout from work and life stressors, or it might be financial, medical or mental strains compiling. Taking care to alleviate workplace stress is a necessary step for creating loyalty among teams and improving performance. How does compensation come into it? Employees who are adequately compensated, and have their needs met by their job are far less likely to be pushed into seeking other employment. The more comfortable your team is, the better they are able to perform, and the less risk you have of top performers being lost to competition.

What is performance based compensation?

Performance based compensation is essentially a reward for any hard work or notable positive contributions an employee makes, serving as an acknowledgment of their work. It is also an incentive for employees and high performers to stay with the company, and continue performing in a certain way.

Other common components included in a compensation package

Compensation packages are designed to attract and keep your strongest performers. Here are some examples:

• Overtime pay
• Commission
• Bonuses
• Long-term incentives
• Health insurance
• Paid time off
• Life and disability insurance
• Flexible work arrangement
• Paid parental leave
• Wellness programs
• Tuition reimbursement
• Employee discounts
• Recognition program

The importance of a high performance culture

Did you know? There have been records of performance management systems as early as 221 AD – it’s been a pivotal part of our society for centuries.

A high performance culture is built based on a number of environmental and business factors. It’s formed on the basis that employers create a working environment that enables their employees to support business goals and deliver their highest quality work.

There are two factors that impact this: the work environment itself, and the individual behaviours that are being reinforced.

Creating the right environment for high performing teams

The right environment allows employees to operate at their peak. Transparent and communicative leaders can build trust and encourage open dialogue in their teams. This empowers employees to share ideas, collaborate, and take initiative.

Meanwhile, leaders who prioritise employee development and wellbeing can generate a sense of loyalty and dedication, as employees feel valued and supported. The result of this is creating teams who autonomously take on tasks, learn projects, and offer innovative ideas.

Reinforcing the right behaviours in your teams

A high performance culture should also have a clear emphasis on reinforcing individual behaviours. At the core of high-performance, we should see a continuous improvement mindset, where employees are driven to constantly seek ways to enhance their skills and knowledge.

Having an innate desire to learn naturally generates a high level of innovation and collaboration, as team members actively exchange ideas and explore creative solutions to challenges. It is also about catching problems before they escalate, which can come in the form of reviews, open conversations, and performance improvement plans.

How does high performance contribute to positive business outcomes?

Employees who feel valued, trusted, and recognised will show higher engagement, lower turnover, and greater pride in their work. This drives growth, learning, and development, improving employee satisfaction and reducing turnover-related costs such as recruitment, onboarding, and training. Satisfied employees are not only more productive and approachable, but they also contribute to improved customer service and profitability.

When employees understand quality standards and expectations, they deliver higher quality work. This alignment with business goals and a positive work environment drives motivation, performance, and continuous improvement. Empowered employees are willing to take risks, learn from failures, and bring new ideas.

Four pillars of a performance based compensation structure

Performance-related pay: Fixed versus variable compensation

Fixed compensation and variable compensation are two different types of pay that employees can receive. Fixed compensation is a steady amount of money that an employee gets regularly, such as a base salary. Appropriately named, it’s called "fixed" because it doesn't change, regardless of how well the employee or the company performs. This type of compensation provides financial stability and predictability.

Variable compensation on the other hand, changes based on specific goals or performance. This includes bonuses, commissions, or other incentives that are not guaranteed and can vary in amount. As an example, a salesperson might receive a base salary plus additional pay based on the number of products they sell. This variable part encourages employees to meet or exceed certain targets because they can earn more money by doing so.

Performance-related pay: Short-term versus long-term

Short-term versus long-term compensation deals with the timing of rewards. Short-term compensation is paid out soon after the achievement of specific goals or milestones. Examples include cash bonuses or commissions that are given to employees shortly after a project is completed or a sales target is met. These rewards provide immediate recognition and motivation for recent achievements.

Long-term compensation is designed to reward employees over a longer period. It often comes in the form of equity, like stock options or shares in the company, which can increase in value over time. Employees might receive these rewards based on their performance or company success over several years. The idea is to align the interests of employees with the long-term growth and success of the company.

Performance-related pay: Cash versus equity compensation

Cash compensation is money given to employees as regular pay, such as salaries, bonuses or commissions. This type of compensation provides immediate, tangible benefits. It's straightforward and easy to understand, giving employees financial flexibility right away.

Equity compensation, however, involves giving employees a stake in the company through shares or stock options. This type of compensation doesn't provide immediate cash but instead offers ownership in the company. As the company grows and becomes more successful, the value of the shares or stock options can increase, potentially providing financial rewards in the future.

Performance-related pay: Individual versus group rewards

Individual rewards are given based on the achievements of a single person. For example, an employee might receive a bonus or recognition for meeting specific personal goals or performance expectations, like completing a project successfully. This type of reward emphasises personal accountability and encourages employees to excel in their specific roles.

Group rewards are based on the performance of a team, department, or the entire organisation. These rewards might include team bonuses or profit-sharing plans, where the entire group benefits if certain company-wide goals are met. Group rewards promote collaboration and a sense of shared responsibility, encouraging team members to work together toward common objectives.

The choice between individual and group rewards can reflect a company's culture and values. Some companies prioritise individual performance and competition, rewarding personal achievements. Others focus on teamwork and collective success, emphasising group accomplishments.

How to create a performance based pay system

Conduct employee research

First, analyse the correct market data in alignment with your employees. Using salary benchmarking, surveys, interviews, or group discussions can all help you understand your employees' needs.

Having this overview, including factors such as industry, age, experience, role, and career goals, will play a vital role in how you shape your paid compensation scheme, and what that compensation will look like in relation to your team.

Conduct market research

We mentioned salary benchmarking earlier. This is where market research returns as an important element for creating your performance-based compensation plan. Check out our salary benchmarking tool to see what similar roles offer in your area.

Aside from meeting employee needs, you want to be offering your teams the same value as other competitors, or more. If your offer isn’t measuring up, you might find that your performance based pay structures are too weak to motivate employees and inspire continuous high engagement.

Creating a performance-based pay model

A pay-for-performance model rewards employees based on how well they do their job. This can include bonuses and incentives (variable pay), higher salaries (fixed pay), or giving employees shares in the company (equity). Select the right type of paid compensation that best fits with your business, accounting for the data collected when analysing employee needs and market trends as well as what resources the business has to leverage. For instance, a retailer might lean into commission-based compensation, as this ensures they only need to pay additional bonuses after sales have already ensured this is feasible. In contrast, large corporations might offer market shares and stocks. Based on your business, and your employees, you can start to shape the right paid compensation system for your unique situation.

Measure your impact with performance metrics

Lastly, you’re going to want to track performance and employee feedback to see if your compensation package is effective. Look at metrics like employee engagement, turnover rates, and performance ratings. If engagement drops or turnover increases after a new reward package, it’s time to reconsider your strategy.

From there, you should use this data to make informed decisions and continuously improve your compensation package.

Unsure where to start with your performance based pay structure? We can help.

We have a salary benchmarking tool to help you benchmark salaries and stay on top of your compensation packages.

And if you’re looking for top talent with the right fit for your business, check out SmartMatch by Employment Hero. It’s an AI-powered tool that connects you with great candidates instantly, and could save you up to 80% on hiring costs.