Definition: Performance Based Pay

When the pay is based on whether the target /objectives are achieved
by the employee, it is said to be a performance based pay.

This was successfully implemented by Jack Welch in General Electric,

where, based on a performance matrix, the employees were rewarded
based on their relative position in the matrix. The top performers were
rewarded handsomely, the middle rung compensated adequately and
the poor performers targeted for elimination. This caused people to
work harder for the fear of being at the bottom drove them constantly.

Therefore, it is highly important to establish quantifiable and

measurable objectives, based on which an employee can be rewarded
adequately.

Employers generally use this method to evaluate how well the

employee works and thus they set the salary for that particular position.
Standard based methods have been in fact used for many years now
among the commission based sales employees. Salespersons receive
more for selling more and low performing salespersons are not able to
earn enough.

Many business theorists including Professor Yasser and Dr. Wasi

supported this method of salary payment. They believed that money
was the biggest incentive for employees to work and thus was
introduced the idea of piece work.

In addition to motivating the rewarded behavior, the above method can

present to the employees a standard level of evaluation. This will help
in reducing fears of favoritism among employees. For example, in a data
entry job, an employer can set a standard minimum of 10000 keystrokes
and evaluate employees based on that figure. This will help employees
as they will know that their performance have been evaluated
objectively and according to some standard measure of work instead of
the whims of the manager or against some climbing average of the
group.
Academic evidence has shown that performance related pay leads to
opposite outcome when applied to cognitive tasks rather than physical
task.

A fundamental criticism of this pay for performance is that the

performance of a complicated or complex job is often reduced to a
single measure of performance which is very simple. For example, a call
center may judge the employee based on the average length of the call
with a customer.

knowledge-based pay

A system of payment where employees are compensated based on

their individual skill level and education attainment. Under this system,
employees are rewarded for reaching certain goals in education,
training and skill development. Knowledge-based pay systems
provide incentive for employees to improve their skill set and
education.

incentive pay System.

A monetary gift provided to an employee based on performance,
which is thought of as one way to entice the employee to continue
delivering positive results. Incentive pay may come in the form of a
bonus, profit-sharing, or commission.
Type of Incentive Plans
2 types or kinds or methods of incentive plans
1) Individual incentive plan

2) Group incentive plan

1) Individual incentive plan: --------

it may either be time based or production based. Under time based plan a
standard time is fixed for doing the job. A worker is said to be efficient if he
completes the job in time and he is given the reward for his efficiency.

i) The time based individual incentive plans are:

a) Halsey plan

b) Rowan plan

c) Emerson plan

d) Bedeaux plan

1- Halsey plan:
under Halsey plan minimum wages are guaranteed to every worker. A
standard time is fixed for the workers. If the workers finish the work
before standard time they are given bonus. But no penalty if they fails to do
that.

Total wages (W) =T*R+ 50% of (S-T)*R

Standard time(S) =15 hours

Time taken (T) = 10 hours

Rate of wages(R) =rs 10 per hour

Bonus (P) = wages of 50% of time saved

Than wages= 10*10+50 %*( 15-10)*10 = rs 125

2- Rowan plan:

it is the modification of the Halsey plan it also guarantees the minimum

wages and does not penalize the slow workers. Standard time is fixed and
the bonus is paid on the basis of time saved

Total wages (W) =T*R+[T*R* Time saved/ Standard time]

Standard time(S) =15 hours

Time taken (T) = 10 hours

Rate of wages(R) =rs 10 per hour

Bonus (P) = Time saved/ Standard time

Than wages= 10*10+[10*10* 5/15] = rs 133.33

3- Emerson plan:

In this plan minimum wages are guaranteed to the workers efficiency is

measured on the basis of the comparison of actual performance with the
standard fixed. Under this method if the efficiency is 100% the bonus
would be paid at 20% and above 100% bonus at 30% would be paid. Thus
efficient workers will be rewarded at an increasing rate with the increase
in saving time.

4- Bedeaux plan:

under this minute is the time unit described as the standard minute. The
standard time for each job is fixed after undertaking time and motion study
expressed in terms of B. the standard time for a job is the number of B’s
allowed to complete it. Generally the bonus paid to the worker is 75% of
the wages for time saved. The rest 25% goes to the foreman.

Standard time(S) = 360 B’s (6hours*60 minutes)

Actual time (T) =300 B’s (5hours*60 minutes)

Wage rate(R) = Rs 10 per hour

Value of time saved=360-300/60*10

=Rs10

Total wages (W) =S*R+75%of value saved

=6*10+75/100*10

=Rs67.5

The above discussed wage payment methods were based on the time while
the wage payment methods based on the productivity are going to be
discussed below:
2) The production based individual incentive plans are:

Under the production based incentive plan a standard output is

fixed and the workers are paid on the basis of the production.
They are given incentive if they produced more number of units
than the standard fixed. it includes the

a) Taylor plan

b) Merrick plan

c) Gantt plan

a) Taylor’s differential piece rate system:

In this plan, Taylor did not give minimum guarantee to each

worker. As per his statement it is possible to calculate standard
workload for every worker on the basis of time and motion
studies. He gave two piece rates for the workers. The lower rate
for average and less efficient workers who produce less than the
standard production and the higher piece rate for the above
average or efficient workers. So the efficient workers are paid
more than the inefficient workers.

Standard production = 40 units in a day

Wage rate = between 60 to 70 rs

If the worker produces 40 units in a day he will be paid 40* 70=
rs 280

If the worker produces 30 units in a day he will be paid 30* 60 =

rs 180

As only those who give standard output or more will be paid at rs

70 and rest will be paid at rs 60 only.

Thus in this method inefficient workers are penalized. Workers

are treated like machines and there is no guarantee of minimum
wages in this method.

b) Merrick’s multiple piece rate plan:

Under this plan there are three grade piece rate rather than two
given by Taylor.

Workers who produce Less than 83% are paid basic piece rate

Workers who produce between 83%- 100% are paid 110% of

basic piece rate

Workers who produce more than 110% paid 120% of basic

Thus this system is improvement over the Taylor’s plan. But this
system also does not give guarantee minimum wages to the
workers. All the workers producing between 1 to 82% of
standard output are considered same and paid at the same piece
rate.

c) Gantt’s bonus plan:

under this method minimum wages are guaranteed. If the worker

fails to complete the task within the standard time he receives
only the wages for actual time spent at the specified rate. But if he
completes the task within time he gets extra wages.

Standard time= 10 hours

Rate= rs 8 per hour
Bonus 25% of the standard time
If the worker finishes his job within 8 hours he will get rs 80 plus
25% of the day’s wages i.e. 80*25%=20 that means total rs
80+20= rs 100 so he will get bonus for 8 hours work.

2) Group incentive plan: under this method group bonus is given

instead of individual bonus. The bonus is distributed among all
the employees of the organization on the different basis which
are as follows:

a) Priestman’s plan: under this method Bonus is increased in

proportion to increase in output.

Increased production/standard production*100

b) Profit sharing method: under this method increased profit is

shared among the workers and management as agreed between
both the parties.

c) Scanlon plan: under this method bonus is paid in proportion to

the production 1% bonus if 1% increases in production.
Internal and External Equity Comparison
Equity Pay
The internal and external analysis allows an organization to evaluate
the compensation plan based on the fairness of employee
compensation. The impact of the internal and external forces is
important when dealing with pay structure. Equity pay is ensuring that
all parties involved are receiving the same benefits based on the
internal and external factors.
Internal Influences
Internal influences involve employees doing the same job, a
difference in job responsibilities, or even a specific department but for
the same company. The structured pay scale could reflect the highest
pay grade at the top and the lowest pay grade at the bottom based on
job responsibility. The pay scale allows the employee to view the
benefits he or she will receive in relation to the responsibility given.
Fair pay and work conditions are an important factor to employees
and influence the morale and employee response. According to
Martocchio (2008), “Job evaluation is key for casting internally
consistent compensation systems as strategic tools. Compensation
professionals use job evaluation to establish pay differentials among
employees within the company”. The evaluation outlines differences
and similarities in job responsibilities, this can be described in the
experience level, performance, and knowledge. Internal equity
ensures that fairness is throughout the organization based on similar
responsibilities.
External Influences
Understanding the external influences is just as important as the
internal factors. An evaluation of external factors allows the
organization to remain competitive in the market. Organizations are
competing to attain the best employees to help their company grow. In
turn pay is taken into consideration to compete with other similar
organizations. The external wage comparisons can be the same
union, geographical area, job similarity, certifications, or the size of
the company. Human Resource Managers is responsible to assess
the outside competition properly in regard to the above mentioned to
maintain a competitive advantage with similar companies. An
employee looking to join the organization can easily find the mean or
medium pay based on the geographical area and job description. An
evaluation of the marketing prices can also be used to retain the
employees already on staff. Competitive business will seek out
employees from other company, so it is important to ensure that the
organization does not allow the competition to steal their employees.
This is referred to as poaching or raiding.
Reward Management
Reward Management is concerned with the formulation
and implementation of strategies and policies that aim
to reward people fairly, equitably and consistently in
accordance with their value to the organization.
The Pay Commission

Pay Commission is set up by Government of India, and gives its

recommendations regarding changes in salary structure of its
employees. Since India's Independence, seven pay commissions
have been set up on a regular basis to review and make
recommendations on the work and pay structure of all civil and
military divisions of the Government of India. Headquartered in Delhi,
the Commission is given 18 months from date of its constitution to
make its recommendations.