Benefits of Pay for Performance

Pay for Performance (PFP) is a very powerful way to create a productivity-oriented culture in any organization. To learn about the key requirements of a pay for performance program, please read our previous blog post, “The Building Blocks for Successful Pay for Performance.” In this post we will continue the discussion with a review of the many benefits of a PFP program. We are big proponents of pay for performance… IF it is designed properly.

Here are several of the key benefits of a well- designed pay for performance program:

Employee Engagement – Nothing aligns an employee with the goals of your company better than pay for performance. They are able to see in their paychecks how their direct actions can lead to positive financial results for themselves.

Employee Compensation – A well-designed PFP program can increase employee wages substantially, which then creates other advantages listed below. In 2004 in one of our operations, employees were making the state minimum wage of $7.75 per hour prior to implementing PFP. After 1 year, the average compensation was $13.50 per hour.

Improved Productivity – This is one of the big drivers of pay for performance. In the above operation mentioned, our cases per hour increased from 73 cph to over 180 cph. We consistently see gains of 25%-50% when PFP is implemented.

Lower Unit Costs – As productivity improves, unit production costs go down, despite the fact that you are paying more per hour with bonuses. A well-designed PFP program is self-funded, and employees share in the value created by their increased productivity. We get excited by big bonus pay outs because we know that for every dollar in bonuses paid, the company earned an extra $1-$2 in net labor savings.

Better Recruiting – For warehouse and production workers, $1 more per hour offered elsewhere will often challenge you in your recruiting efforts. With PFP, good performers can make above market wage rates while at the same time reducing your per unit production costs due to improved productivity.

Reduced Turnover – With pay for performance, turnover may initially increase as poor performers rotate out, but over the long run, turnover drops dramatically due to increased pay and employee engagement. We often see turnover drop by 50% or more once the program is fully rolled out and embraced.

Cultural Change – PFP creates a culture of productivity. In one of the operations we used to manage, employees were so motivated to get back to work after a break that we would have to remind them not to run (since it was a safety issue). Employees would often compete with each other to see who could achieve the highest daily bonus.

Reduced Supervisor Oversight – PFP changes the role of the supervisor. The employees begin driving the process versus the supervisors having to push them. The supervisor’s role then becomes that of a coach, helping to encourage employees and remove obstacles.

Pay for Performance is an incredibly powerful tool when designed properly. We have worked with it for over 20 years, and in today’s hyper-competitive labor market, it can be a game changer for your company.