Should Your Business Try a Pay-for-Performance Model?

kathryn by Kathryn Hawkins on January 13, 2011
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Many jobs incentivize employees by making a certain percentage of salary commission-based. But what happens when you do away with base pay altogether, and pay for positive results only?

For most employers, the strategy may sound tempting. Implementing a performance-based pay structure for contract workers is likely to significantly lower your payroll, and will motivate your workers to be as productive as humanly possible — after all, if they don’t do what you’ve hired them for, they won’t bring home the bacon.

But is it really a good business strategy? Two business owners who’ve tried the pay-for-performance model share their thoughts on the pros and cons.

First, the pros:

It’s cost-effective. “There is no cash outflow unless you are receiving value that drives key metrics,” says Mike Markarian, CEO of Iamhungry, a restaurant-focused daily deals site that has employed sales staff on a pay-for-performance model.

It’s an easy way to run a virtual business, says Linda Pophal, owner of the PR firm Strategic Communications. She has hired remote contractors on a model in which they receive compensation when they get a media placement for a client. Under the pay-for-performance model, she doesn’t need to worry that she’s paying her contractors for hours that they aren’t actually working. “It frees up my time from needing to supervise and manage a full-time staff,” she says.

But on the downside…

It can be tough on the workers. “When people hit a cold streak, and it happens, it can be 
demoralizing to work a full week without pay,” says Markarian. “Part of me says that’s the nature of the compensation structure. The other part is compassionate to putting a hard day’s work in and things simply not coming together.”

You have minimal opportunities to train or educate workers. “Because the people I’m currently working with are new to the PR world, they could probably benefit from more instruction,” Pophal says. “But I’m very aware of not crossing the line into treating them like employees vs. contractors.”

Your needs may not be their top priority. If contractors are juggling multiple projects, they’re likely to prioritize the ones with a guaranteed income. “I’m not convinced that they’re able or willing to devote as much time to my projects as to other activities they’re engaged in that pay on an hourly basis or that require them to be someplace ‘working’ at a certain time,” says Pophal.

Have you hired any employees on a pay-for-performance model? If so, what’s your experience been like? Share your thoughts on why you would or wouldn’t use this model in the comments.

kathryn

Kathryn Hawkins is a business writer for Intuit and is passionate about solving small business problems.

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