The Role Of Pay Structure And Pay For Performance In Employee Satisfaction
Posted on June 30, 2021
One of the essential aspects of employee satisfaction is compensation. When employees are well compensated for their work, they tend to be more content and more productive, ultimately benefiting your company. The two most prevalent ways to compensate employees are: a fixed salary or pay for performance (also known as bonuses). The employer has to cover the two bases, i.e., hiring the right people and treating them well, to ensure the desired outcomes.
Let’s take a closer look at what salary structure and pay for performance mean and how they affect employee satisfaction and performance.
Salary structure refers to the components of employees’ compensation and the payment mechanisms. It significantly impacts employee performance, satisfaction, productivity, turnover rate, morale, and absenteeism.
Among the most common types of salary structures are:
Market-based Fixed Annual Salary
Employees are paid a fixed amount, either biweekly or monthly. Under this scheme, the employees receive their full salary as long as they don’t take unauthorized time off. If there is less work, no work, or closure from the employer, employees remain entitled to receive their full salary.
Bands of salary levels are groups into which employees fall based on their level of experience and education. There is a minimum and maximum salary level for each band.
Employees’ opinions about salary structure vary greatly depending on their skillset and experience level. As long as they believe they are being treated fairly and equitably the salary structure keeps them satisfied.
Pay for Performance
Pay for performance involves a fixed salary with the potential for an increase in pay if specific goals or outcomes are achieved. In other words, performance-based incentives (in addition to the fixed salary) are offered to the employees when they do well on their jobs.
The pay-for-performance system often has a negative impact on employee satisfaction. Several surveys show that employees are dissatisfied with pay-for-performance systems because they feel it is not equitable and fair, their rewards seem arbitrary. There is little transparency in how pay is determined. Some think that they should get more money if they perform better because their work is worth the extra pay, and others believe in a fair system, where all team members get paid equally.
Employee satisfaction significantly affects the productivity of an organization. If you want to improve your company’s culture and reduce turnover, understanding how salary structures affect employee happiness may be an excellent place to start. Salaries should align with productivity for employees to feel are being fairly compensated for their efforts at work. Pay for performance can also help motivate employees by rewarding individual responsibility and accomplishments while still maintaining fairness across all levels of experience or tenure.