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Well-Known Pitfalls of Tying Compensation to Performance

Posted by Jessica Miller-Merrell


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Tying compensation to performance can be a tricky and slippery slope for employers to travel down. Companies that want to enact a program like this need to be aware of the common pitfalls and do their best to build a program that helps avoid them. If you’re considering doing this, take into account the following dangers.

It Hurts Team Collaboration

Team members anxious to improve their performance may avoid working with others they perceive to be less able, which ultimately will exclude many employees from the more rewarding projects. Keen competition for limited rewards can create a hostile environment, in which trust and cooperation are sacrificed in the interest of self-promotion. There must be a good balance between individual competition and team dynamics.

It Increases Employee Conflict

When competition is introduced in the workplace, it’s sometimes difficult to maintain positive workplace relationships. Time after time employers try out new methods to increase productivity, but what is the real cost? For the individual whose only goal is to make it to the top, they will forego all workplace formalities and do whatever they can to reach their goal. Workplace relationships suffer when compensation is involved directly, and the best way to receive better compensation is to beat out all your friends and colleagues.

Its Difficult to Evaluate Performance Objectively

Aside from the negative impact on employee relations, the company may also suffer from trying to implement a compensation-based performance method. Since performance evaluations can be highly subjective, depending on the relationship between an employee and his or her supervisor, enforcing a system of tying compensation to pay can introduce inequities that are counter-productive for the organization as a whole.

Reasons for Rewards are Ignored

A commission system might lead a manager to blame an employee when he or she doesn’t meet quotas, when the real problem may be inherent in the organization. Thus, tying compensation to performance might end up hurting your top talent and the organization as a whole. Other factors outside of the employee’s control, such as an underperforming marketing department, might be the real reason for a lower performance.  If  an employee is blamed for this kind of problem, he or she might not stay for long.

It Decreases Risk-Taking

If compensation is tied to performance, employees will be less likely to take risks because their paycheck could suffer. This will take away from your company’s ability to foster a creative and innovative environment. People will be less likely to pursue hunches and take risks because they’ll be afraid that they won’t make as much money. In a compensation-based performance model, taking chances can essentially be non-existent.

In order for a company to successfully implement the method of tying compensation to performance, it must create reasonable, achievable, and measurable goals that can be reached by any employee in the organization. And the program must be comprehensive enough to include carefully monitoring and accurately assessing the success of each employee.

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About Jessica Miller-Merrell


Jessica is listed as the 2nd most influential recruiter online and as the 8th most powerful woman on Twitter. She is the author of Tweet This! Twitter for Business, a how-to business guide for Twitter users. She also writes for a number of leading publications, including Fortune, HR Magazine, SmartBrief, and HR Executive Magazine.

2 COMMENTS Join the discussion
  • Daniel F May, 25, 2013

    Unfortunately, there is no other “fair” system of employee evaluation, so we have to make do with what we have. Not to turn it into a race between our employees, we need not to employ stack ranking, and if every member of our team deserves a raise, they should get it. Numbered compensations are the ones that can create dissention at the work place.

  • Tammy Reynolds May, 26, 2013

    Maybe a system of employee evaluation system that doesn’t take place just once a year can solve these problems. Have transparent trimestrial evaluations on which both the employee and the employers agree on, and everybody should be happy.


Guest May, 26, 2013