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—Harvey B. Mackay, author of Swim with the Sharks Without Being Eaten Alive

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Some individuals, often those working in sales, are paid using a performance-based system that links compensation to accomplishments—for example, an employee making $36,000 a year could potentially increase his income to $40,000 by meeting designated goals, such as decreasing outsourcing or raising productivity. The extra $4,000 would be paid as a yearly bonus, and the base salary would remain $36,000 for the next year. If these objectives aren’t reached, the employee’s pay rate does not rise above the base wage or salary. Performance-based pay systems have been shown to make employees more effective and productive than straight salaries. A 2006 survey by WorldatWork, an association for human resources professionals, showed that 79 percent of employers now use performance-based pay, up from 66 percent in 2001.

Some employers use a skill-based system, basing pay on the number of skills the employee possesses. More than half of all Fortune 500 companies reward at least some of their workers on this basis, usually those in the manufacturing sector. When employees acquire new skills, their pay increases, and if each skill is assigned a price according to its value to the business, employees are motivated to acquire new skills. Some employers also add the incentive of a variable-pay program and give bonuses for extraordinary individual or group performance in addition to skill-based pay.

Whatever your system is, it’s important that you explain it to the prospective employee when you present your offer. Also tell your chosen candidate how his or her work will be evaluated, how superior performance will be rewarded, and what measures you use to determine incentive payouts, if any.

Bonuses

In addition to offering a powerful performance incentive to employees, bonuses benefit corporations by allowing them to reward key players without raising their fixed costs. During the hiring process, you will quickly learn that bonuses can also be a major component in salary negotiations. For this reason, you need to be aware of the various types of bonuses your company offers.

Annual bonuses are given each year to all eligible employees. The amount varies from year to year depending on what the company has earned and how the individual employees who are being rewarded have performed.

Though annual bonuses are typically paid in a single sum at the end of the year, other types of bonuses can be used as incentives and rewards at various times.

Signing bonuses are offered as incentives for the most desirable candidates to sign on with a firm, especially in fields that are intensely competitive. (The employee has to remain with the company for a specified period of time, however, or repay the bonus.)

Incentive bonuses are given (to both individuals and groups) to reward an important accomplishment or outstanding performance, such as a payment to an advertising agency’s design team when their campaign wins a major new client.

Retention bonuses are given to attempt to keep especially valuable employees, such as specialists or high-performing managers and executives, from leaving.

If your salary offer is less than stellar, consider sweetening the pot with a bonus—either now or in the future—to win over a candidate who may be wavering.

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Outside the Box

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ALTERNATIVES TO STRAIGHT SALARY

Traditional salaries are what most employees are familiar with. That standard is changing, however, as more companies begin to offer alternative types of salaries. These newer models are based on incentives or skills and are intended to align an employee’s pay with the effort he puts into his job—and the degree to which those efforts impact the bottom line.

The Variable Pay Model – Variable pay, or “pay at risk” is contingent upon performance or generated results. It is a way of “incentivizing” employees and then allowing them to share in the profit from their increased contributions to productivity. When companies