Most technology start-ups employ some combination of base salary and performance pay to get the best out of their key executive, sales and operations staff. Performance pay may be based on indicators such as sales, the number of customers served, the number of units produced, lines of code written, overall company profits or other measurable indicators.
The basic principle of performance pay is:
Performance-based pay attempts to incentivize value-creating behaviour at a company but imposes a risk on its employees.
Striking the right balance between performance pay and base compensation for each job area at your company can be determined with help from the following guiding questions:
If the answer is yes to many of these questions, then performance-based pay may make sense as a powerful way to motivate your employees.
Objective vs. subjective performance indicators
Motivating the right behaviors is often difficult to accomplish using only objective performance measures like sales, units produced, or customers served. Sometimes it is necessary to incorporate subjective performance measures into the calculation of performance pay. Peer evaluations, customer satisfaction indices and quality assurance are good ways to balance objective performance measures and ensure that all the key value-creating behaviors are encouraged.
The teams problem
When people work in teams, it often happens that certain members do most of the work while the others coast. If team members are compensated individually from the fruits of overall team performance, the coasters will get the benefits without putting in the work. Adding a subjective measure of performance evaluation to performance pay for people who work in teams is an effective way to mitigate coasting. If team members are also evaluated based on their peers’ opinions of their work effort, they will generally perform better. The best performing teams are those that work together over long periods, are relatively small, are transparent, and are working toward some future payoff (ie. a successful product launch, project completion, important company revenue milestone, and so on).
A lot of thought should go into choosing the right indicators for performance pay. Important considerations include:
Once you have a good sense of whether performance-based pay will motivate your employees to create additional value in particular job roles, you can set the performance and base salary components accordingly.
STRATEGY EXECUTION: Designing the High-Performing Organization. INSEAD Professor Douglas H. Frank, January 2008.