Most companies don't have performance based pay plans, they have pay plans and hope for performance.
We see that today in the size of payments being made to CEO's of failed or troubled banking institutions and public companies.
Performance pay plans are based on establishing individual goals that support the success of the overall company.
Performance pay plans share the risk between the company and the employee.
Base compensation is the company's risk.
Bonuses are the employees' risk.
Performance pay plans are based on a belief that exceptional performance deserves exceptional pay and average performance deserves below average pay.
Performance pay plans offer low guaranteed pay with tremendous upside for producing the performance asked for by management and the Board.
To implement a performance pay plan in your organization, the following five steps need to be taken:

1. Identify what needs to happen for the company to be successful.
   Determine what each area and each individual has to do individually to make the company successful.
   Remember, people will do what you pay them to do.
   Make sure you establish the right goals
2. Pay for margin or income, not sales.
   It's easy to lower prices to gain sales but you may generate less margin and income as a result.
   
3. Volume drives cost.
   Lower margin business may drive up the cost structure in general and lead to lower profits
4. Reward individuals for their performance and then think about rewarding a team.
   Do not reward team members that are not carrying their fair share of the load.
   
5. Target base compensation in the lower 1/3 quartile of people doing the same job in other companies.
   Target your bonus plan to get them into the 90^th percentile or higher of compensation for the job if they perform.
   
6. Don't cap compensation.
   If you're willing to pay 30% of the margin generated as a bonus at $100,000 you should feel the same way at $1,000,000 and beyond.
   Don't get greedy and try and cap pay just because the number is getting bigger than you think it should.
   70% of a bunch is always better than 100% of nothing.
   
7. You're asking employees to share risk with you when you target lower base pays.
   Since they are taking more risks, you have to give them more freedom in how they produce results.
   You have told them what needs to be done, give them some latitude in how to do it.
   You will be surprised at how well most people do in this environment.
   
8. Don't accept poor performance.
   If someone is not producing they need to be let go.
   In performance based systems, under achievers that are allowed to hang on will eventually destroy morale and performance.
   Your team will only be as good as the worst player.
   

When you find a plan that works, you can modify elements within the plan to spur increased performance, but leave the basics of the plan intact.
Consistency is important.
Performance based pay plans work.
People feel empowered when they know exactly how and how much they can get paid.
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