How do you design and implement a performance-based reward system?

2 Choose the performance measures

The next step is to choose the performance measures that will be used to evaluate and reward employees. Performance measures can be financial or non-financial, quantitative or qualitative, input or output oriented, individual or group based, or a combination of these. You need to select the measures that best reflect your objectives, that are reliable and valid, that are easy to understand and communicate, that are balanced and comprehensive, and that are consistent and fair.

3 Set the performance targets

The third step is to set the performance targets that will determine the level of reward for each employee or group. Performance targets can be absolute or relative, fixed or flexible, short-term or long-term, or a mix of these. You need to set the targets that are challenging but attainable, that are aligned with the market and industry standards, that are responsive to changes and uncertainties, and that are agreed upon and accepted by the employees.

4 Determine the reward types and amounts

The fourth step is to determine the reward types and amounts that will be offered to the employees based on their performance. Reward types can be monetary or non-monetary, tangible or intangible, intrinsic or extrinsic, or a combination of these. You need to determine the reward types and amounts that are attractive and motivating, that are affordable and sustainable, that are proportional and differentiated, and that are ethical and legal.

5 Implement and communicate the reward system

The fifth step is to implement and communicate the reward system to the employees and other stakeholders. You need to have a clear and transparent process for measuring, evaluating, and rewarding performance, that involves the participation and feedback of the employees, that provides timely and accurate information and reports, that recognizes and celebrates achievements and improvements, and that addresses any issues or concerns.

6 Monitor and review the reward system

The final step is to monitor and review the reward system on a regular basis, to ensure that it is effective and efficient, that it is achieving its objectives, that it is satisfying the employees and other stakeholders, and that it is adaptable and flexible. You need to have a systematic and ongoing process for collecting, analyzing, and interpreting data and feedback, that identifies and evaluates the strengths and weaknesses of the reward system, that suggests and implements any changes or improvements, and that assesses the impact and outcomes of the reward system.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?