The idea of performance-based pay is heavily stigmatized. We conjure images of vociferous salespeople or billionaire CEOs raking in eight-figure dividends while the rest starve. But if your salary isn’t performance based, then what are employers paying you for?

The vast majority of professional workers are paid salaries calculated on hourly rates. You work 40 hours a week in order to take home $X a month — this is not, technically, performance based. But if you “work” all 40 hours every week and don’t actually do anything, you probably won’t be paid. Not for very long, anyway.

So in reality, there’s a minimum amount of “performance” we all need to achieve in order to get paid. In this article, we’re going to look at some of the ways time-based pay can cripple productivity and seriously harm company performance. We’ll also consider the alternatives and why companies might be averse to launching them.

Do your employees have any incentive to work well?

It’s common for bigger businesses to have the same job role executed by multiple people. Their workloads, objectives, and salaries are usually very similar. Let’s assume you pay an industry-competitive rate for a 40-hours-a-week contract. It’s fascinating to examine what happens when employees complete all their tasks but don’t take 40 hours to do it.

Sedate Simon

Simon is a model employee: turns up on time, wears a tie, gets his work done. But on average, he works 50 hours a week. Now if we ignore the culture of glorifying overworking that’s plaguing America, Simon is working 25 percent over his contracted hours — what should the company do about it?

Since his salary is based on an hourly rate, should he be paid 25 percent more? Not likely. In fact, despite putting more hours into the company, Simon is likely to be berated for being slower than other employees.

We could lower his workload so he can work the correct number of hours, but then he’s contributing less than everyone else for the same pay. His slow output would, indirectly, make everyone else’s superior output less valuable.

Efficient Emily

Emily is fantastic at her job. As well as being outgoing and personable, she gets all her weekly tasks done and dusted in just 30 hours — and in virtually all industries, she is penalized for it.

For a start, the vast majority of employers will then say, “Well, here’s another 10 hours of work to do.” Fair enough — she is contracted to 40 hours after all.

But Emily has now been given zero motivation to work efficiently. Her reward for completing tasks quicker and better than everyone else? More work, for the same pay. And if she requested to take the rest of the week off, say, after finishing all her tasks, it would almost certainly require a 25 percent pay cut — because she’s clearly contributing 25 percent fewer hours!

Simon’s situation can be tricky, but it’s people like Emily who are punished most by time-based jobs.

The fallacy of hours worked versus value generated

Every company’s goal should be to get as much value as possible out of every employee. In their turn, they should pay fairly for that value.

If you’re going to employ Simon to work 40 or 50 hours a week to complete X, then you should jump at the chance to hire Emily to do it in 30 hours. Then let her take the time off or work 6-hour days or whatever she wants — the net gain for your business is simply greater this way.

This is the ultimate problem with time-based salaried work: it enables less-committed employees to do the absolute minimum, and offers your best employees zero incentive to do good work. You can’t have your cake and eat it too — the role is either time based (which incentivizes taking as long as possible to do work) or it’s outcome based, in which case you should cheer when someone can deliver your outcomes in less time.

Hours worked is not — and has not been for a very long time — any reliable indicator of performance. If companies want to retain talent (and that’s something they are seriously struggling to do) they need to embrace a complete shift in mindset that rewards employees for creating value, not sitting at their desk.

How we can replace time-based contracts

How do you replace your time-based contracts? Make your contracts outcome-based. Wasn’t that easy?

Every company has some form of review system: the manager sits down with the employee and prescribes (or preferably agrees through mutual discussion) a set of goals or outcomes for the next period.

Outcome-based contracts are a simple extension of this. Every week, you sit down (virtually or in-person) and agree on the goals for each team member and what that work involves. Over time, you’ll all figure out the right balance of workload and responsibilities. And thanks to the massive increase in ownership, trust, and feeling of empowerment, your team’s productivity will skyrocket.

“That sounds great, but it couldn’t possibly work for my company”

If you’re already thinking, “No way, that could never work in our company,” I’ll bet my retirement savings it’s because of trust. Too many employers hear a statement like, “Give your employees the objectives and let them sign off whenever they’re done” and assume they’ll get screwed over:

• They’ll just spend all day playing video games!
• The quality of work will be terrible!
• They’ll hardly be in the office!
• They’ll take the money and run!

But these assumptions couldn’t be more wrong. The reality is that giving workers control over their hours makes them more productive and more reliable. And the incentive to be productive is intuitive: if they work well and efficiently, they get more time doing whatever they like to do.

It’s also worth noting that the vast majority of employees care about the quality of their work. Giving them the chance to work fewer (but better) hours will not impact this quality. And for the minority who would jump at the chance to work less and submit sloppy work, well, they would’ve done that anyway.

Why time-based contracts are still the norm

While no one can say for sure, I think the core issue is the perceived risk, the lack of trust, and the fact that hourly agreements are just so ingrained in the fabric of western workforces. Most people can’t even conceive of work being non time-based — even if the alternatives offer massive increases in employee happiness, creativity, and productivity.

That’s not to say it’s not happening. There are companies offering salaries that aren’t tied to fixed hours. And the results are unsurprising: it’s a massive success.

This kind of transformation won’t happen overnight and you’ll need the right management in place to make it work effectively. Still, if your organization is looking to ramp up productivity and address the plague of employee churn and workplace negativity, outcome-based contracts might provide a smart way forward.