Many times, I’ve asked employers from different companies this question: How many of you feel that your company has a good performance-based reward system?

Before anyone can respond, I provide these qualifications: a performance-based reward system that regularly provides employees with weekly to monthly discussions on areas of improvement, substantial extrinsic rewards (e.g., salary increases, bonuses and prizes) and intrinsic rewards (e.g., career development and recognition) for high performance, with only minimal rewards for low performance.

At most, two to three people in an audience of several hundred would confirm that their organization has an equivalent system in place. The rest of the audience would then want to know what company employs such lucky people. The typical response from the two to three audience members would be: “I’m self-employed.”

The problem with most reward systems is that the design of the system itself is rooted in false assumptions about what motivates employees. Today, most company reward systems are designed with yesterday’s world in mind and what past employers assumed their employees desired from their jobs.

In helping organizations rethink and redesign their reward systems, I’ve found it very useful to ask employers to state their assumptions to these key questions:

  • What is motivation?
  • What is performance?
  • What is objective measurement?
  • What is a reward?
  • How can an organization motivate high performance with extrinsic and intrinsic rewards?

In response, many employers begin with out-of-date assumptions about what they think motivates their workers to excel. They assume that all employees are intrinsically the same and are motivated by making more money; so they just pay their workforce more. However, some employees are motivated by rewards other than a higher salary. High-performing employees are often in search of intrinsic rewards, like recognition.

After thoroughly discussing assumptions about reward systems with an audience of employers, their updated assumptions change to:

  • Employees’ self-worth is based on both internal criteria (e.g., personal identity and self-confidence) and external criteria (e.g., college degrees, job titles and financial net worth).
  • Employees’ work life can satisfy external criteria for self-worth and can be an important forum for self-expression.
  • Workers have varying self-worth and needs for extrinsic and intrinsic rewards.
  • Organizations should practice open communication when distributing extrinsic rewards, (e.g., promotion), so employees can compare the value of everyone’s contributions.
  • Most employees want to take ownership in their contributions to the company, rather than “rent” themselves to the organization.
  • Most workers are reasonable about what they expect to receive from their organization as long as they’re treated with respect and are given the opportunity to influence key decisions that may affect them.
  • Employees like feeling appreciated. A smile and a “thank you” goes a long way.

Based on the audience’s change of heart on how human nature relates to employees’ work-related needs, we can define the characteristics of a practical, performance-based reward system:

  1. First, the organization must share a unified reward policy for measuring performance and distributing performance-based rewards to employees. This encourages a consistent and transparent reward system that allows employees to notice who received a performance-based reward and why. Furthermore, the policy should require that every employer’s performance rating include an assessment of how well he or she conducts performance reviews with their employees.
  2. Second, every autonomous unit in the organization, e.g., wholly owned subsidiaries, can design a performance-based reward system according to their individual company’s success. Internal and/or external human resource experts can be assigned to ensure that all technical guidelines and legal requirements for the system are adhered to.
  3. Third, despite the slight differences between reward systems across the organization’s subsidiaries, there should be an overarching similarity. The key performance indicators (KPI) that determine a worker’s overall productivity should capture the value of their short-term results and long-term contributions. Although there may be slight alterations based on separate units within the organization, there should be a distinct formula for measuring performance. An employee’s performance can be measured through organizational and team assessments across departments, or through quarterly performance reviews that measure a worker’s contributions in decision making.
  4. Fourth, employees should be trained on the organization’s expectations for performance goals and should have access to relevant business information across functions (i.e., financial, marketing, manufacturing, human resources, and the like) supported by proper training on how to use this information in meaningful and responsible ways.
  5. Lastly, an organization should offer a range of extrinsic and intrinsic rewards to satisfy their employees’ unique motivations. In most cases, a cafeteria-style benefit package is offered to employees so they can adjust their health insurance, life insurance, pension plans and other fringe benefits. The same practice should be used with performance-based rewards. As a part of a performance reward package, organizations can include educational and career development opportunities to high-performing workers.

Reward packages can also include flexible working hours and work from home privileges. Other examples include skill-based pay to reward those who acquire additional expertise and to develop a multiskilled work force, cash bonuses based on performance or even stock options so employees can invest in their own organization.

To encourage high performance amongst employees, cash bonuses can be distributed based on individual and team success. Annual bonuses can often be a convincing incentive in a performance-based reward system since they can easily range from zero to 100% of a worker’s salary. Spot bonuses, given for a short burst of effort or a special accomplishment, are excellent reinforcements as well.

Of course, the greatest incentive for employee performance is affording one another the simple pleasures in life: warmth, care, thoughtfulness, appreciation and kindness. To align employers with the reward system, organization should facilitate training on fine-tuning interpersonal skills to conduct performance reviews and coaching sessions in a direct, yet empathetic, manner.

If employees’ performance reviews are determined by the effectiveness of an employer’s counseling and training, it is amazing how far employers will strive to improve the organization’s performance. However, the reward system must be designed with clear expectations and key performance indicators (KPIs) that will satisfy not only the organization’s future needs, but each employee’s unique motivations.