Uncovering the benefits and challenges of performance-based salary structures and how they impact on employee motivation and organisational success.

Salary structures have evolved significantly over time to meet the changing needs of organisations and employees. Traditional salaries were often based on a fixed pay scale, where employees were compensated solely on their position and/or seniority within the company. However, with the increasing emphasis on performance and individual contributions, along with employee expectations relating to flexibility, organisations are shifting towards performance-based salary structures and for some, benefits to encourage employees to spend more time on-site.

As many organisations in Australia are reviewing remuneration for the upcoming financial year, we thought it timely to look at considerations for remuneration in 2024.

Performance-based salary structures.

While traditional salaries prioritise responsibilities, performance-based salary structures prioritise outcomes and achievements.

Bayside Group General Manager Wayne Eaton says a significant increase in performance-based salary structures in the last five years has emerged due to economic instability. “We are increasingly seeing salary packages, particularly for roles at a mid to senior level, that have incentives, commission or bonuses attached. Previously, performance-based incentives were more common in sales or project-related roles,” he explains. “Now we see performance-based pay structures in diverse roles at all levels.”

The increase in performance-based salaries in recent years has been driven by the desire for organisations to align employee rewards with their actual contribution to the company's success. By linking pay to performance, organisations aim to motivate employees to perform at their best and drive better results.

Employee remuneration in Australia includes base salary and superannuation (mandatory), benefits such as a car, insurance, additional superannuation (optional), and any other elements of fixed remuneration. For some, allowances may also be incurred for overtime, on-call/standby or shift work. Performance-based salary structures generally then have additional incentives, commission or bonus pay that is based on achieving targets or key performance indicators (KPIs).

The shift towards performance-based salary structures has also been influenced by the changing nature of work and the challenges associated with retaining high performers and managing organisational costs. Performance-based salary structures allow organisations to differentiate compensation based on individual performance, providing a fair and transparent way to reward high performers and incentivise others to improve. Unlike other countries, base salaries remain relatively high in Australia in line with employment legislation, even when applying performance-based salaries. This has clear benefits for employees, facilitating higher earnings and greater ownership of their work.

This model provides organisations with the flexibility to align higher earnings with organisational outcomes while driving accountability and continuous improvement. A strong performance-based salary structure can, therefore, help attract talent in a competitive job market because top performers are compensated accordingly.

“Where performance-based remuneration doesn’t work,” says Wayne Eaton, “is when targets or KPIs are simply unachievable or are unfair to specific employees or employee groups. This has the opposite effect and can be the catalyst for employees to leave.”

If implemented correctly, performance-based remuneration can provide a fair and transparent way to allocate compensation. Instead of relying solely on subjective measures such as seniority or politics, performance-based salary structures offer a data-driven approach to determining compensation. This reduces biases and ensures that compensation decisions are based on merit and performance rather than personal preferences or favouritism.

Creative benefits to address the cost of work.

Another element that is impacting wages and retention in Australia is work flexibility. In Australia, 65% of employers are urging staff to return to workplaces, higher than the global average of 56%. However, a higher cost of living combined with a directive for many employees to work more hours in the office has created tensions in many organisations. For those employees who have embraced working from home, employers face perceptions of increases in costs, time and energy to work on-site, all factors that may impact performance. According to the Harvard Business Review, 67% of workers feel that going to the office requires more effort than it did pre-pandemic, and 73% say it feels more expensive. An Australian survey found more than half of employees said they are willing to give up a pay hike to get their desired flexibility at work.

According to Wayne Eaton, work-life balance has become more important to many candidates. However, priorities do depend on the individual; many are happy to work on-site, particularly in roles that require collaboration. “Organisations need to understand individual drivers and how they might align with organisational needs when recruiting new employees and conducting pay reviews. Lesser-known organisations are offering more flexibility and other benefits to compete with their larger counterparts, providing candidates with options.”

It is, therefore, first essential for the organisation and individuals to understand why working in the office is critical and how much time they need to be there to achieve organisational goals. Where it is important, understanding how to manage perceptions of time-saving and the financial impact on employees is necessary. Examples of how organisations are combating the time and energy of working in the office include flexible working hours to allow for traffic avoidance or school pickups, four-day work weeks and, for 90% of organisations, mandated weekly office days when meetings and training sessions are scheduled.

In reviewing the cost of coming into work, organisations have become creative, with some providing benefits such as subsidised public transport/parking, lunches, bonuses or different KPIs, and even extra annual leave. For some organisations, high performers are provided with more flexibility than those not achieving their goals. However, many organisations will argue that this then inhibits them from building a strong organisational culture that is led by high performers.

When implementing performance-based pay structures and reviewing your work/life balance model, accurately linking pay to performance and an individual’s contribution to organisational culture is critical. Employee measurements need to be clear and transparent and align with organisational strategy, learning and development, continuous feedback, and performance reviews.

Bayside Group is an award-winning recruitment organisation. If you’re looking for top talent or require industry insights, contact us today.