Expert panel: How employers can rethink pay-for-performance in a volatile economy

Pay-for-performance must now be more than a process — it must be a philosophy. To maintain both trust and motivation, organizations need to reassess how they connect rewards to performance, ensuring that incentives support long-term sustainability, equity and employee well-being.

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Market volatility has disrupted the familiar rhythm of compensation cycles. Salary budgets are tightening and bonus pools are harder to fund, yet employee expectations haven’t adjusted accordingly. After several years of above-average merit increases, many employees have come to expect similar increases year over year, even as organizations face slower growth and increased financial scrutiny.

This disconnect reflects a deeper shift in how employees perceive compensation. What was once understood as ‘at-risk pay’ — bonuses and incentives tied to business performance — is now often viewed by employees as a guaranteed part of their compensation. This shift erodes the motivational power of variable pay, creating a growing gap between organizational intent and employee perception.

Simultaneously, broader expectations are reshaping the performance landscape. Employees now demand both personalization and fairness in pay. New pay transparency laws, combined with heightened social awareness, are driving organizations to provide clearer rationale for compensation decisions. The result is a growing need for pay systems that are both equitable and provide clear rationale.

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Even the best-intentioned incentive plans can lose their impact if not regularly reviewed. In many organizations, key performance indicators are still tied to legacy business models that no longer reflect today’s realities where compensation growth is slower, performance definitions have evolved and long-term sustainability carries as much weight as short-term results.

Too often, incentive programs measure what’s easy to track, not what truly drives value. Common warning signs include everyone earning at or near target year after year, ‘meeting expectations’ being perceived as underperformance and bonus funding becoming disconnected from actual business outcomes. When employees don’t understand what drives their variable pay, or when payouts seem guaranteed regardless of performance, the system stops motivating and starts eroding trust.

A modern pay-for-performance model must strike a delicate balance between business reality, motivation, and fairness. This process begins with revisiting the organization’s compensation philosophy and answering what outcomes they’re truly trying to reward and how those outcomes align with strategy and culture.

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From there, organizations should reassess the weight of financial and non-financial performance metrics. Financial measures must remain central as they ensure accountability and discipline, but complementary indicators such as sustainability, engagement and client outcomes can help capture broader business priorities. The right balance depends on each organization’s strategic focus and risk tolerance.

Clarity is equally important. Incentives should be simple, measurable and directly linked to performance drivers that employees can influence. Overly complex KPIs dilute accountability, while vague metrics weaken motivation. Fewer, more meaningful measures create focus and transparency.

Finally, organizations must reinforce the concept of ‘at-risk’ pay. Bonuses and incentives are earned, not guaranteed. Setting that expectation, through education and consistent communication, helps employees understand variability in outcomes and reduces the sense of entitlement that has crept into many programs.

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Pay transparency has moved from a nice-to-have to a business imperative. As new regulations emerge and employees seek greater clarity, organizations with clear and defensible compensation frameworks will be best positioned to maintain credibility and retain talent.

Effective communication plays a critical role in this process. Managers need tools and training to explain compensation outcomes confidently and empathetically. Employees should receive regular updates on business performance throughout the year, avoiding last-minute surprises when bonuses are finalized. Employees who understand why pay decisions are made are more likely to perceive them as fair, even in years when increases or payouts are smaller.

When managed thoughtfully, transparent pay-for-performance systems can strengthen trust and psychological safety. They show employees that even in financially uncertain times, decisions are made with integrity and consistency.

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To evolve pay-for-performance approaches in today’s economy, it’s important for organizations to audit their current programs to identify disconnects between business results and payouts, while reassessing incentive mechanics to ensure they drive the right behaviours and remain financially sustainable. They should also define what performance within their organizational culture, aligning metrics with both outcomes and values.

The future of pay-for-performance isn’t about abandoning incentives, it’s about making them more intentional. As organizations navigate financial pressures and rising employee expectations, compensation must evolve from a mechanical process to a strategic trust mechanism.

By realigning incentives, communicating with transparency and redefining performance in broader terms, employers can sustain motivation, strengthen engagement and remain competitive — no matter the economic cycle.

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