For a long time, the world of employee compensation and rewards has remained fairly simple. There was goal setting done at the start, managers will give feedback to the employees; the frequency could be quarterly, half-yearly, or annually. The rating given with the feedback will be used to generate the final increment for the employees.
All the innovations were done within the boundary of this system. Some companies abolished the bell curve, at least on the surface. Some changed the goal-setting mechanism. Some started using sophisticated talent management models to separate annual increments with performance bonuses/variable parts.
This model, although relevant for a long time, still never made anyone happy. Employees felt their overall work was reduced to a rating, ignoring the subjectivity and complexity involved. Managers felt that multiple 1:1 discussion, feedback documentation, and calibration meetings were just unnecessary HR overheads eating their precious time. The subjectivity also made many people feel that systems are biased and merit is not recognized
Fast forward to 2025, with a completely different generation challenging the existing norms at workplaces, the old reward system also looks obsolete, and a radical change is expected to keep the employees productive and engaged.
A new model that can potentially replace the ‘pay for performance’ is the ‘pay for impact’ model.
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The ‘Pay for impact’ model expands the horizon. Instead of judging an employee’s performance solely on goals, the overall impact created by their work for the team, for the organisation, and even to the society/outside world is considered. It addresses the key demand of both millennials and Gen Z that they are driven not only by financial incentives but by more meaningful work.
The key considerations for a ‘Pay for impact’ model will be:
- Clear Definition: Organizations need to have very clearly defined what impact means and decide metrics accordingly, otherwise, it will be prone to subjectivity like earlier models
- Holistic Performance Evaluation: Organizations need to have holistic performance evaluation to measure the impact, especially the impact on organisation and outside ecosystem to make the process fair and coherent
- Strategic Alignment: The impact metrics should be consistent with what the organization wants to achieve in the short run and the long run
- Customization: The reward process needs to be customized as per the requirement of the organization and improved based on the feedback from business leaders
Implementing a ‘pay for impact’ framework will require significantly overhauling the existing performance system.
- Redefining goal setting: Companies need to decide how they will do goal setting or KPI setting. It can be the standard top-down cascading approach, it can be more decentralized and done on a team level, or it can be purely customized to individuals and more loosely based.
- Organisation-wide alignment: The next step would be to ensure that multiple silos are not created and all the employees are still working towards common organisation-wide goals and the net intended impact within and outside the organization.
- Reducing subjectivity: The feedback mechanism needs to incorporate modern practices like 360-degree evaluation, qualitative & quantitative feedback, continuous evaluation, etc. New AI-driven tools provide excellent features these days, documenting the feedback and also evaluating performance through the regular ‘check-in’ between managers and employees along with normalizing the feedback for the entire Organization.
- Coherent Communication: From the beginning till the very end, the communication needs to be tightly managed by the rewards team and the leadership so that there is no confusion or lack of clarity between employees and they don’t think the process is random and unfair.
Rethinking reward in a ‘Pay for impact’ framework:
“The traditional pay-for-performance model has played its role, but it’s time to rethink how we reward employees. An impact-driven approach better aligns with the evolving workforce and organizational priorities.” – Manish Panwar, Business Head, Xumane
The most crucial part will remain to reward the employees fairly to ensure they remain engaged, satisfied, productive, and invested for the long term. Organizations should try to get away with old age practices of rewarding employees because of their qualifications or power of role and switch to rewarding based on skill and potential.
The pay structure also needs to reflect the same. Employees doing transactional and repetitive work can be given close to 100% fixed pay, and with increasing seniority, the variable part can be added and increased.
Employees who are doing more complex work ending in higher net impact in the short run or potential for a very high net impact in the long run, i.e. a time frame of 3-5 years, should be rewarded with wealth creation options like ESOPs, RSU, etc.
The recent examples of companies like Nvidia in the US or Swiggy in India creating several multi-millionaires because of stock options have created a charm in new-age employees to go beyond the cash component and have more skin in the game by betting on the company’s long-term success in terms of accepting stock options.
Overall, we can consider the ‘pay for impact’ option as a forward-thinking approach and the next step in the evolution of the traditional reward system. Some companies like Unilever, Salesforce have already implemented ‘pay for impact’ in some ways. The need of the hour is for every company to recognize that they are dealing with a very different workforce now and the way of working has also changed.
All companies need to proactively look at their reward system and adapt newer practices like ‘pay for impact’ to stay in sync with what the employees want and stay ahead in the game.
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