Tip of the Week: Is performance-based pay right for your business?

Oct. 6, 2010 at 5:06 a.m.

Does your business have trouble with profitability? Does your business seem to constantly go over budget on bids for projects and jobs? Does it seem like your employees could be more productive?

If so, you may want to look at implementing a performance-based pay program for your employees.

I recently attended a seminar put on by Ron Collier, president of Collier Consulting Group. Collier discussed how to implement a performance-based pay program.

Following are some helpful hints that Collier shared with us:


First the business needs to understand their business financials and how the business makes a profit before looking into implementing a performance-based pay program.

The reason is that a business has to first determine what the measurement of productivity or performance should be based on to achieve the ultimate goal of maximizing profits. In other words: What could be offered as an employee incentive to be more productive but also would allow for an increase in business profits?


There are many different variations of performance-based pay programs that can be implemented.

Some of the more common performance-based programs are based on a percentage of sales or net income, a standard dollar amount per each item sold and/or by type of item sold, and a certain dollar amount for each product completed.

The business can also offer extra incentives for projects completed on time and done right. The type of program implemented will vary from industry to industry and business to business. Regardless of which program implemented it is important to keep in mind the goal of the program - to increase productivity, sales and profitability for you, the business owner.


Once the business establishes the policy of how the performance-based pay program will be determined, the business owner then needs to test the program.

Collier suggests testing this on some of your best employees. Pick one or two employees, and tell them you will test this for a month. At the end of the test period, determine what the employees liked and disliked about the program.

Modify the program, according to employee suggestions, and keep in mind the program needs to drive up productivity and profits.

If it will work for your business, then it's time to roll out the program to all employees. Once started, the poor performers will rise to the top or find employment elsewhere.

A business can expect to lose 20 percent of current staff once the program starts. However, the remaining 80 percent has been known to pick up the slack and be more productive than before.

After you implement the program, continue to monitor it by soliciting feedback from employees and management. Learn about any problems that might arise. An effective performance-based pay program should increase the employees pay by 20 to 35 percent and business productivity by at least 40 percent. Collier said it's not unusual to reach 70 to 75 percent productivity increases.

Of course your bookkeeper will have to do a little more work with payroll, but it will be worth it.

Also, don't be scared that an employee's paycheck will be larger than the owner's paycheck for a given pay period. That is good because you, the business owner, still reap the additional profits made by the employee's increased productivity. It's a win-win for both employee and employer.

Stephen Kilgore is a business adviser at the University of Houston-Victoria Small Business Development Center.



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