How Incentive-Based Pay Affects Performance: Top Takeaways
Incentive-based pay has long been a motivational tool for getting business through the market, especially in sales and go-to-market teams. Compensation tied to performance helps companies align the goals of the workforce with business objectives. However, new survey data shows effectiveness actually can be undercut if there is mistrust over how commissions and bonuses are calculated and distributed.
In this article, we talk about the impact that occurs when there is no transparency in employee motivation and performance, and what the company can do to increase the level of trust and accuracy in incentive-based pay systems.
The Incentive Pay Motivator
More precisely, a recent Compensation & Motivation Pulse Survey said that for many employees, incentives-based pay is a powerful driver. When asked about their experiences with commission or bonus-based pay, the results were clear:
- 57% of the workers answered that commissions or bonuses were motivating influences to work better.
- 52% say that this drives them to hit their goals consistently.
- 44% say it improves their job satisfaction, while 43% say it helps them feel more engaged in their work.
Yet, the survey also indicated that the downsides to salary systems based on incentives are as follows:
- 18% of all the employees surveyed claimed that because of such pressure to attain their goals, they feel less engaged.
- Overall, 22% said that pressure to hit targets made them anxious.
- Only 7% reported no impact of commissions/bonuses on performance.
These findings demonstrate that while incentive-based pay may, in fact, be a good motivator, everything depends on the way it is established.
Challenges to Incentive-Based Pay: Lack of Trust and Transparency
With incentive-based pay, they need to believe that commissions and bonuses are correctly calculated and paid in a timely manner. As it turned out, there were a number of issues in this regard:
- Accuracy: Less than half of employees surveyed are fully confident that commission payouts are always accurate.
- Timeliness: Close to half of the total respondents said commission or bonus was paid late.
- Transparency: A third said they had no idea how their commission was calculated or that sometime or another, they were underpaid on commission or bonus.
It is not an isolated incident but part of the general problem because it would undermine the trust in incentive-based compensation systems. Delays or uncertainties on recalculations reduce the motivational level and minimize the overall performance of the employee.
Productivity and Performance Impact
Even rewards-based pay systems may lower employee productivity, as workers lose trust that such systems will actually work for them. The survey indicated that:
- After all, a majority of 55% express that they have questions about how their compensation is calculated during most or every pay period.
- 85% of the commissionable employees surveyed said they at least sometimes have to manually recalculate their commissions to confirm the accuracy of their payouts.
If employees have to invest their time in checking and verifying the commissions manually, they are taken away from revenue-producing activities, which hurts productivity big time in the long run. Secondly, it is so common that sales managers have to resolve commission calculation disputes. Over 50% of the managers use 2-3 days every pay period addressing these issues.
Opportunities for Improvement: Building Trust in Incentive-Based Compensation
1. Commission Calculation Accuracy
One of the most potent ways in which confidence can be fostered for an incentive-based pay system includes accuracy in commission calculation. Companies should invest in automation systems to eliminate any risks associated with errors and provide real-time insight into how commissions are calculated. This levels the playing field to ensure that staff members are able to understand how their performance directly impacts their pay, driving greater trust and engagement.
- Real-time visibility: An automated system will, in turn, enable employees to view their earnings in real time, thereby steering clear of manual calculations that are prone to errors.
- Error Reduction: Reducing manual input means that payout errors for corporations could be reduced by a landslide.
2. Improve Timeliness of Pay-outs
Equally important is timely payout of commissions and bonuses. Not only do delayed payouts frustrate workers, but they also contribute to a situation where employees lose faith in compensation schemes. Every company should put in place an efficient payout schedule and ensure that it does not experience any form of disruption in paying workers.
- Consistent Payout Schedule: Consistency in the payout schedule eliminates the possibility of frustration and instead fosters trust amongst employees.
- Clearly Communicate: In case of a delay or modification in the payment, communicate it to your employees well in advance so that their expectations are set right.
3. Enhancing Transparency and Communication
In regard to the structure of incentive-based pay systems, it’s very important to have transparency that would instill confidence in the system. The staff should understand just why their commissions and other bonuses are a result of, and questions or concerns should be addressed without much ado. This means more frequent updates related to how performance metrics tie into compensation and detailed payout statements that would show where the figure is coming from.
- Detailed payout statements: The employees should give clear and thorough details of how commissions and bonuses have been calculated.
- Open Channels of Communication: Allow the employees to ask relevant questions and provide speedy solutions for any payout discrepancies.
Conclusion
Incentive-based pay can be a strong driver of motivation and improved performance in sales teams. But clarity of issues around accuracy, timeliness, and transparency of compensations should be paramount for companies. Only then will companies be able to instill confidence in the way commissions and bonuses are calculated and paid, thereby unlocking fully the motivational power of incentive-based pay in driving better performance across their teams.
This means that companies should keep perfecting their incentive strategies and make employee trust paramount while closely linking compensation plans to overall business goals and objectives. That would help the culture of performance excellence burrow deeper into their DNA in order to keep the employees better motivated and engaged at work.