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Leadership / Salaries

3 Steps to Better Motivate Employees With Performance-Based Pay

Avoid underpaying your current talent and overpaying new outside hires by following these three steps to fair compensation.
3 Steps to Better Motivate Employees With Performance-Based Pay
Image credit: graphicstock
- Guest Writer
Founder and CEO of Acceleration Partners
7 min read

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Did your parents ever warn you not to discuss sex, politics, religion or money in polite company? Still another taboo topic follows naturally from that list: salary.

One of the biggest fears about salary information becoming public is that it will highlight a discrepancy where two people doing the same thing or performing at the same level are paid different amounts. Consider the allegations that Google has discriminated against its female employees. According to the subsequent U.S. Department of Labor lawsuit, Google would not give up the goods when it came to disclosing employees’ salary histories.

Related: Money Talks: How To Determine Your Employees' Salaries

That was, and is, a problem because, when salary discussions are off limits, employers can more easily discriminate on various grounds -- and employees can't prove it, despite their suspicions. Consequently, whether the motivation is disclosure requirements or simply the desire for more transparency, openness about salaries promises to become an even bigger issue for businesses.

In our experience, it’s beneficial to pay people based on performance and actual results, not their future potential return on investment. The challenge ,however, often lies with how you decide to pay people on day one.

Which comes first: performance or compensation?

As our business grew, we faced this problem more than once. When we began hiring experienced candidates to fill senior roles, we found that they often came from larger companies with better compensation packages. Hesitant to offer them lower salaries, we ended up paying them more than some of our existing talent, hoping we would benefit in the long run from their experience.

Of course, these high-paid employees still needed to learn the ropes at our company. And we found that it could take six months or even a year for their experience to pay off. In the meantime, we were paying them more than someone else doing essentially the same job at the same performance level or possibly at a higher level.

That didn’t sit well with us. It seemed unfair. We also discovered that these new hires frequently struggled at Acceleration Partners. They faced high-pressure expectations based on their compensation and often did not live up to them. So, after a few such failures, we decided to change the rules of the game by adopting a two-pronged policy: “Pay for Day One and Promote When Ready.”

Fair compensation yields better outcomes.

The essence of this policy is that we pay employees for the job they are able to do on the day they arrive, not for their impressive resume or future potential.

In that context, we focus on candidates who are willing to take a small step back in exchange for higher long-term rewards and responsibilities. These are the people who have faith in their own abilities, and that their confidence will be rewarded.

Rather than pay up-front for capabilities that we are not yet leveraging, we promote and adjust compensation as soon as someone is ready for the next level -- even if that happens within a matter of months. This way, two people doing the same job are always paid the same, which is critical to maintaining a performance- and results-oriented culture like ours.

Here are some ways you too can employ this policy to build and enjoy the benefits of a fair, performance-based culture.

1. Hire for fit, not experience.

Experience is relative; what really counts is fit.

There's a big difference between someone with 10 one-year experiences (i.e., at different jobs) and someone with one 10-year experience. The former is just about time, and the latter is really about gaining depth of knowledge in a specific discipline. Just because a candidate moved around for pay raises every few years doesn't mean he or she gained the deep expertise needed to get a leg up in your business. Likewise, a seasoned industry veteran in your space might not be up on the latest trends or may have lost some of the drive that makes another, less-experienced candidate hungrier for success.

To illustrate, New England Patriots head coach Bill Belichick has built one of the greatest dynasties in the NFL by making unemotional decisions based on the actual value each player on his team provides. Like Belichick, great company leaders put the business’s needs first.

If an experienced hire brought in from the outside struggles for several months to get up to speed, that delay could affect client acquisition and retention, employee morale and other aspects of your business. Josh Bersin, founder of Bersin by Deloitte, has said it can take up to two years for any new employee to become as productive as current team members. This, along with inevitable errors in customer service made along the learning curve, not only negatively impacts morale, but also the bottom line.

Related: Why So Many Businesses Mess Up Employee Development

So, hire based on fit rather than experience. Seek out candidates whose values align with your company's core values and, as employees, are willing to grow with you.

2. Show internal candidates the love.

There's a talent shortage these days, which makes in-house talent infinitely more valuable. According to a 2016 research report by the Society for Human Resource Management, 68 percent of HR professionals find recruiting these days challenging.

Never underestimate the value of a player who's already working well in your culture, even if the new position might present a learning curve. One employee who took a 20 percent pay cut to join us, for example, ended up with a 20 percent raise within two years. Another employee was promoted three times in just one year.

We base all promotions on accountability for the responsibility at the next level and the fit an individual has with our core values. It’s all about merit. When you provide real avenues to growth, people will surprise you by taking full advantage of the opportunity.

3. Use salary to motivate, instead of breed resentment.

As mentioned earlier, one of the biggest headaches for a growing company is navigating salary discrepancies among people doing the same job. An employee who rises quickly from a junior position, for example, might be earning less than a new hire with more experience. And in today's open workplaces, employees often resent such inequities.

Allowing open discussion around compensation can actually alleviate bitterness, foster healthy competitiveness and encourage employees to improve themselves, in order to get to the next level. Such an open environment helps people learn what they need to do to get there, and new research supports the idea that pay transparency is also good for the bottom line.

A recent study published in the Journal of Business and Psychology found that pay secrecy between individuals is hazardous to employee motivation, performance and retention. Alternately, transparent salary information improves collaboration because teammates have an easier time identifying the right resources to ask, for help, based on how much people earn. Even if you don’t have transparency, there shouldn’t be many surprises if it is eventually disclosed. That’s the real goal.

Related: Understanding the Science and Psychology of Open Salaries

The most important overriding principle of “Pay for Day One and Promote When Ready” is to pay for the value that an employee can deliver for you, not for a glowing resume or a vast amount of relevant experience that may not have a practical application for your business. Don't underpay your current talent or overpay a free agent. If you follow this advice, you'll have a culture focused on outcomes -- not inputs -- and your compensation system will make sense to everyone at every level of the hierarchy.

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