Time for Change: Moving to the Performance Economy
One of the things that we’re most proud of in the UK is our sports stars. In the last 20 years, UK sport has turned itself around. From the first British Wimbledon champion in 77 years (Mr Andy Murray) to placing second in the Rio Olympics medal table – we’re seeing a resurgence in British sport. We seem to have learned how to elevate our athletes to the top stage, with performance-related pay playing an important part in this shift to success.
Leicester City football team won the 2015/6 Premiership after a lucrative bonus scheme was established, and for our Olympic athletes their funding relates directly to the number of medals they achieve. Our sporting heroes have shown that variable pay unlocks performance.
On the whole, the UK still operates on an outdated salary economy: Paying people based on their position and tenure, rather than their output. This isn’t a productive model, especially for the modern workforce. Psychologist Frederick Herzberg’s theory proposes a distinction between the impact of peoples’ salaries and bonuses on their work output. Salaries are a maintaining factor, while bonuses are a motivational factor. Simply put, salaries get you to work, while bonuses are what you work for. This is true across the board but is particularly important for motivating Millennials and Generation Z, so understanding this principle is very important as younger employees continue to enter the workplace.
Salary and promotion should not be linked to tenure. Businesses must move from the dark ages to the modern world, by rewarding employees for their output through the performance economy. Empirically linking pay and performance and using data, will ensure that employees are being rewarded fairly for what they do and ultimately motivate workers to be more productive, by delivering tangible rewards.
For the performance economy to work in practice, it’s clear that workers’ output needs to be measured objectively and accurately, with a clear link to financial incentives. Systems like Xactlys Incent™ can be vital for tracking performance and calculating bonuses. Managers must also be very active, assessing and reviewing employees’ performance regularly, and not just relying on annual reviews. Variable pay should be rewarded more frequently than once a year, to keep workers motivated over time.
When designing their own incentive schemes, businesses must assess their workforce and identify what they need to do to be successful, and then apply corporate metrics to measure execution against these goals. That way, organisations will create a clear link between company objectives and workers’ execution on the ground. It’s also vital that businesses set the correct level of incentives compared to other organisations. Businesses are able to do this by using empirical data to check their rewards against their peers’s rewards. This ensures that businesses are able to stay competitive and protect their staff retention.
The rewards of the performance economy are huge. It is a fairer system which will lead to more engaged and productive employees, which in turn increases business profitability. Ultimately, it could be the move that catapults your company into the big leagues.
Move your Business into the Performance Economy by:
- Design a variable pay structure to create a clear link between company goals, employee performance, and reward. A bonus is a powerful tool to influence employees’ behaviour so make sure that your incentives reflect your overall business objectives.
- Consider how your compensation scheme compares with others in your market and region, and use external data to make sure your bonuses are competitive. This will help to ensure that you don’t lose your best staff to competitors.
- Monitor your employees’ performance on a routine basis rather than annually, so that ongoing great performance is rewarded
- Give employees real time visibility of the bonuses they are earning, to keep them motivated throughout the year.
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