Are you struggling with the concept of 3P salary and KPI, and still unclear about the relationship between these two factors in business management? How is the 3P salary calculation method implemented, and how does it relate to KPI? In the following article, KMC will provide you with a complete explanation of the concept and essence of the 3P salary calculation method along with KPI.
3P Salary and KPI: The Essence of the 3P Salary Calculation Method
3P is a salary calculation method based on three factors, including:
- Pay for Position – Salary based on the job position (P1)
- Pay for Person – Salary based on the competence of the person holding the position (P2)
- Pay for Performance – Salary based on the performance of the person holding the position (P3)
The 3P salary is not merely a salary calculation method. It is a pay philosophy based on objective value, eliminating subjectivity and internal inequity.
The details of 3P in this method are as follows:
1. P1 – Pay for Position
Salary is determined based on the value of the job title within the organizational structure. Based on the job description, labor laws, and market salary levels for each job position, the enterprise will pay a corresponding salary for each position.
There are several criteria for enterprises to determine the salary level for each position, such as:
- Detailed Job Description (JD)
- Working environment: Level of complexity, risk, and hazards of the working environment
- Market salary framework (benchmarking) and Vietnamese labor law regulations
After identifying the evaluation criteria, a scoring table is established for each criterion, followed by evaluation and aggregation of results for each job position.
Note: Enterprises need to accurately assess the value and importance of each job position to maximize the effectiveness of this salary calculation method.
2. P2 – Pay for Person
Pay for person is salary based on the qualifications and skills of the employee in meeting the job requirements set by the enterprise. To implement effective pay for person, the enterprise needs to develop a competency framework for each position as well as evaluate employees’ competencies.
The enterprise will base salary determination on criteria such as:
- Educational qualifications, degrees, and certifications
- Professional experience and skills
- Achievements attained (possibly related to P3)
3. P3 – Pay for Performance
Pay for performance is salary based on the degree of task completion by each employee and the business performance of the enterprise. Enterprises may choose from the following performance-based pay methods:
- Salary entirely based on work completion coefficient: Salary determined by productivity rating (A, B, C). This method encourages employees to strive to complete their work at the highest level.
- Salary combining fixed and variable components: This method provides employees with assurance of receiving a fixed monthly salary, while also motivating them to strive for better performance.
The fundamental difference compared to the traditional method (primarily based on qualifications and seniority) lies in transparency and result orientation. A young employee with outstanding capabilities and high performance in the 3P salary system can fully earn a higher salary than a senior employee with only average performance. This creates strong motivation, attracts, and retains talent – a key competitive factor for FDI enterprises in the Vietnamese market.
3P Salary and KPI: Decoding KPI and Its Relationship with 3P
KPI (Key Performance Indicator) is a metric used to measure the performance, effectiveness, and quality of task execution by each individual, department, or the entire enterprise. KPI is an indispensable measurement tool for successfully implementing component P3 (Pay for Performance) in the 3P salary model.
- P3 is the “What”: The philosophy of paying based on results and performance.
- KPI is the “How”: The specific method to identify, measure, and evaluate performance in a quantitative, objective, and fair manner.
In other words, KPI is the backbone of P3. If an enterprise has a 3P salary system without a clear performance measurement mechanism like KPI, P3 will become vague, subjective, prone to disputes, and counterproductive, failing to ensure fairness and accuracy.
Conversely, an accurate measurement and salary calculation mechanism helps to:
- Precisely quantify the level of task completion.
- Link individual goals with departmental and company-wide goals (aligned with the team-working culture in Japanese enterprises).
- Provide a transparent basis for calculating variable pay (bonuses, commissions, performance-based salary).
By understanding the relationship between P3 and KPI, FDI enterprises can build a salary and reward system that is both fair and effective, meeting the requirements of compliance with Vietnamese law and international practices.
Why Do FDI (Japanese) Enterprises Need to Combine 3P & KPI?
The simultaneous application of 3P salary and KPI is not only a trend but also the optimal solution to address the specific challenges faced by foreign-invested enterprises, especially Japanese enterprises.
The outstanding advantages and benefits of combining the 3P salary method and KPI include:
- Ensuring absolute fairness & legal compliance: FDI enterprises are often under strict supervision regarding labor rights. The 3P + KPI system eliminates subjectivity, relying on objective data (position, evaluated competencies, quantifiable KPI), thereby creating internal transparency. The 3P salary method together with KPI also serves as clear evidence of compliance with wage regulations and non-discrimination requirements under the Vietnamese Labor Code.
- Comprehensive performance management: Beyond salary payment, the 3P salary and KPI system becomes a powerful management tool, enabling FDI managers to:
– Clearly define objectives (through KPI) aligned with company strategy
– Closely monitor the performance of each individual and department
– Promptly identify strengths and weaknesses for training plans (see also how to link KPI with training). - Creating strong motivation & employee engagement: Japanese corporate culture values dedication and loyalty. 3P + KPI salary helps employees clearly see their career progression path (P1, P2) and how they are fairly rewarded for their efforts (P3 via KPI). This is particularly effective in the multicultural environment of FDI companies, where a common language of performance is essential.
- Attracting global talent: A transparent salary system based on value and performance is a major competitive advantage in attracting high-quality candidates, both domestically and internationally, aligned with the global human resource development strategies of multinational corporations.
Practical Implementation: From Theory to Concrete Formula
Applying the 3P salary and KPI calculation method in an enterprise must be carried out through a structured process with clear steps:
1. Standardize the Position System (P1)
Standardize the position system to determine appropriate salary levels for each job title:
- Develop/complete job descriptions (JD) for all positions.
- Conduct Job Evaluation to determine the basic salary scale for each title, aligned with the Vietnamese market and global policies.
2. Develop and Assess a Competency Framework (P2)
Build a clear competency framework to evaluate performance effectively and accurately:
- Identify core competencies and professional skills required for each position.
- Establish an objective, periodic competency evaluation process (often combining supervisor assessment, peer review, and self-assessment).
3. Design an Effective KPI System (for P3)
- Define KPIs using the SMART method, measured by five criteria: Specific, Measurable, Achievable, Relevant, Time-bound, tailored for each position and linked to company goals.
- Set clear weighting and measurement methods.
- Clearly define how to calculate the variable salary/bonus component (P3) based on KPI.
4. Build a Comprehensive Compensation & Benefits Policy
Integrate 3P into a holistic salary structure, including benefits aligned with FDI corporate culture and Vietnamese law (insurance, paid leave, etc.).
5. Communication & Training
Clearly and transparently explain the system to all employees, with a particular focus on how KPI affects income (P3).
6. Select Supporting Technology
Implement an integrated HRM (Human Resource Management) software with a 3P salary calculation module and advanced KPI tracking to ensure accuracy, efficiency, and sustainability.
KMC – Providing Professional and Comprehensive Payroll Solutions
Applying the 3P salary and KPI calculation method brings significant benefits to any enterprise. However, not all organizations or businesses know how to implement this method accurately and effectively.
If your enterprise is struggling with payroll calculation and determining salaries for your workforce, you need a professional unit to provide consultation and support in building a salary calculation plan that ensures accuracy, fairness, and transparency. Contact KMC – a company specializing in professional tax and accounting advisory services for enterprises.
KMC offers professional 3P and KPI payroll solutions, applying technology to automate the entire process. An integrated management system (such as the solutions KMC consults and implements) allows:
- Seamless data integration: Connects data from position management (P1), competency assessment (P2), KPI tracking (P3), and automated timekeeping.
- Payroll automation: The system automatically applies complex formulas to accurately calculate each 3P salary component based on input data, especially the variable KPI-based rewards according to established formulas (see details on KPI salary/bonus calculation).
- Full transparency: Employees can view their salary structure and how KPI results affect their income (if configured), increasing trust in the system.
- Instant & strategic reporting: Generates reports on payroll costs, employee ROI effectiveness, and market comparisons with just a few clicks, supporting high-level management decisions.
Proud to be a trusted partner of thousands of organizations, especially FDI enterprises, KMC understands the specific challenges and needs in human resource and payroll management. We provide comprehensive consulting and technology solutions to help enterprises build and operate 3P and KPI payroll systems efficiently, creating a lever for sustainable growth.
For professional payroll solution consultation for your enterprise, contact our hotline: +84 91 988 9331 to receive prompt advice and support from KMC experts.
