Experts and CEOs alike love the concept of pay for performance, but making the most of such a system requires some finesse. If you have established a robust process for reviewing your employees, you have already tackled the hardest part of performance-based raises and bonuses. But here are some additional tips:
Don't surprise anyone. If your employees' raises or bonuses depend on hitting certain performance benchmarks, communicate that well in advance. It creates an environment of fairness, and you will be more likely to get the performance you want. And, of course, if you tell them you are going to tie pay to performance, be sure to follow through.
Start with raises. Rick Galbreath recommends mastering the performance-review process and merit raises before moving on to incentive bonuses, which are harder to calibrate with any precision.
Be a little extreme. The greater the disparity between what top performers and underperformers get, the more effective the system. More companies are withholding merit raises, bonuses, and even cost-of-living increases to those who score poorly. But that rebuke should come with a carrot: a remedial period followed by reevaluation. If the employee improves, he or she gets a raise after all.
Rise or fall together. Rewarding individual efforts is essential, but it's also worth tying a portion of the bonus pool to the overall profitability of the company. That puts everyone on the same team; prevents workers from focusing on their own tasks at the expense of the bigger picture; and inspires people to contribute good ideas, even outside the scope of their jobs.