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.

Measuring Quality of Hire: You Can’t Improve What You Can’t Measure

Quality of Hire metrics can help you make better hiring decisions and improve the performance of your staff overall. Developing metrics that accurately track applicant skills and employee productivity will help you implement standards and processes that best meet your company’s unique needs. It’s the first step to building the best possible staff for your company.

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Jessica Miller-Merrell

Jessica Miller-Merrell, SPHR, is an author, speaker, Human Resources professional, and workplace social media expert who has a passion for recruiting, training, and all things social media. She is the president and CEO of Xceptional HR, and a leader in the HR community with more than 12 years of industry experience. The author of Tweet This! Twitter for Business, Jessica was named by HR Examiner as the second most influential recruiter on the Internet and the seventh most powerful woman on Twitter. She is a columnist for both SmartBrief and The Huffington Post, in addition to Blogging4Jobs and Human Resources One on One. Jessica has been interviewed for professional articles in CIO Magazine, Entrepreneur Magazine, SHRM’s HR Magazine, and on CBS. Jessica earned a Senior Professional in Human Resources designation in 2008, and holds a bachelor’s degree in Anthropology and Business from Kansas State University. Originally from a small town in Kansas, Jessica currently lives near Oklahoma City with her husband, Greg and daughter, Ryleigh.


  • Avatar Daniel F says:

    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.

  • Avatar Tammy Reynolds says:

    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.

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