PERFORMANCE RELATED PAY 1

Performance Related Pay

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Table of Contents

Introduction...............................................................................................................................................3

Overview of the Topic...............................................................................................................................3

positive impact of pay for performance...................................................................................................3

Team and individual incentive plans........................................................................................................4

Importance of incentive plans…………………………………………………………………………………………………………..4

Conclusion..................................................................................................................................................7

Reference List............................................................................................................................................9

List of Figures..........................................................................................................................................10

Performance Related Pay

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Introduction

Performance-related pay refers to a strategy where workers are paid based on their work

quality. The form of payment is an effective approach to encourage workers to work hard and

produce as much as they can (Pettinger, 2016, n.p). The performance-related pay can also be

linked with financial rewards such as; bonuses upon reaching set targets, profit sharing, and sales

commissions, among others. Today, many companies are adopting the use of pay for

performance plans. Most firms that have properly designed the pay for performance designs have

realized positive outcomes.

Overview of the Topic

Compensation is an integral factor in employee-employer relationship and is therefore an

important aspect of human resource management. Pay for performance is an example of some of

the recent compensation forms in the business world. Some of the commonly used measures of

employee performance include; production output, fiscal targets and production gains among

others.

Positive impact of pay for performance

If pay for performance designs are well applied, several positive impacts are realized.

Often, a manager and his employees have different goals. A manager wants employees with

strong ethics so as to effectively take productive actions and increase the productivity of a

business. On the other hand, employees want a good pay and in some events they might not have

the interests of the business. A well designed pay for performance plan can be applied in such a

case so as twin the objectives of the company and those of employees to boost productivity.
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Many companies and government sectors are applying the use of pay packages to

motivate their employees. Several companies that have applied the performance-related pay have

translated with increased productivity. In a study conducted by M.A Huselid examining human

resources in different companies showed that companies that tied pay to performance had an

average of $27, 000 dollars per employee (Duggan, 2015, n.p). Such organizations use the

strategy as a way to recognize and reward employees who work hard and produce high-quality

performance. High-performing employees are rewarded with huge bonuses, and a larger merit is

realized. Such organizations are aware that employees need to have some control over the

company's goals and objectives and also understand the importance of constant feedback to the

employees. Low-performing organizations adopt a strategy whenever they want to meet certain

corporate goals (Wentworth, 2019, n.p).

It is, however, essential to note that although most companies have adopted the pay for

performance strategy, most of them do not know how to effectively apply it. A company could,

for instance, use annual bonuses and merit pay as a way to reward employee performance. The

bonuses are determined by an employee’s objective rating compared to his/her workmates, while

the merits involve competency rating scales. Also, companies need to establish a customized

system that they will use when motivating their employees [ CITATION Maw19 \l 1033 ]. No matter

the strategy chosen, it should drive positivity and encourage behaviors that will lead to positive

growth of the organization.

Team and individual incentive plans

Incentives are cash payments offered to employees if they performance exceeds a

predetermined scale. Incentive systems are divided into two. They can either be individual or

group incentives. In individual incentives, several approaches can be considered. They include;
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compensation based on merits, piece-rate incentive programs that involve paying workers the

workers based on the quantity of the output, commissions, and bonuses (Gerhart, 2017, 95). In

all the above approaches, however, the rewards are directly linked to the performance of an

employee.

Importance of team and individual incentive plans

Individual and team incentive plans have various effect on human resource effectiveness.

To begin with, studies show that incentives have an impact on subsequent performance

(Mawhinney, 2019, 45). When a company introduces incentive schemes, employees show to

exert more effort compared to when they are on fixed pay. Tying individual and team

performance to incentives is therefore likely to increase performance in a company.

Incentive compensation can be used in an organization where the cost of monitoring

work are high to improve employee performance. For instance, employee benefits motivates an

employee through benefit satisfaction. A study conducted to evaluate the impact of employee

benefit on organization productivity showed that, when a company introduces a flexible benefit

plan, there is an increase in employee satisfaction (Layard, 2011, n.p). Employees become

motivated to work on their projects and devote their energy and time to the company’s objectives

hence produce high quality goods. By doing so, the company is able to acquire a great market

share (Eijkenaar, 2013, 117). It is also important to note that employees play a crucial role in

building a company’s brand name and reputation. When employees are satisfied and motivated,

positive feedback is translated to the customers hence an organization is able to maintain its

customers and attract new ones.

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If the incentive plans are well designed, they are likely to motivate workers to work hard

and focus on working in line with the company's objectives. They can also improve employee

recruitment and retention. For instance, if an employee is choosing among different job offers,

they are more likely to choose a job which has attractive employee benefits. However, if the

incentive plans are poorly implemented, they are likely to hinder the company's objectives

(Gibbs, 2012, 17). Although individual incentives lead to performance improvement in a firm,

some limitations might be observed. Sometimes, the incentives might lead to competition among

the employees, causing undesirable results. For instance, when a company offers commissions,

sales agents might fight over the customers so as to get huge sales and end up scaring customers

(Miller & Babiarz, 2013, 74). To overcome challenges associated with individual incentives,

companies have adopted group incentives. Under the programs, several teams are rewarded for

their performance. Employees are, therefore, motivated to work and cooperate so that all

employees can benefit (Ogundeji, et al., 2016, 1141). Several profit-sharing plans have been

developed to tie employee rewards and reduce antagonism caused by individual incentives.

Some of the advantages of group incentives are that they encourage group cooperation and unity

among employees. Team members also encourage each other to perform to their best so that they

will receive a bonus.

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Fig 1

Conclusion

Performance-related pay refers to an approach where employees receive financial

rewards. Some of the systems include offering bonuses, commissions, and financial profit-

sharing, among others. Evidence from various studies has shown that effectively apply, pay for

performance have positive impacts. There are two types of incentive systems; there are

individual incentives and group incentives. Individual incentives are often paid annually and are

based on quantitative and qualitative scales. On the other hand, group incentives vary in terms of

duration. They can occur on a monthly basis or on annual bases and are usually based on

quantitative measures. When pay for performance designs are well implemented, several

positive impacts are realized. For instance, employees become more motivated and satisfied with

their job hence devote their energy and time towards doing their best to meet the company’s

objectives. Also, individual and team incentives boost the overall performance in a company.
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Employee are crucial assets in a company, if there are satisfied and motivated, positive feedback

will be realized with the way they treat the customers.

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Reference List

Duggan, K., 2015. Six Companies That Are Redefining Performance Management. [Online]

Available at: https://www.fastcompany.com/3054547/six-companies-that-are-redefining-

performance-management

[Accessed 2 May 2020].

Eijkenaar, F., 2013. Key issues in the design of pay for performance programs. The European

Journal of Health Economics, pp. 117-131.

Gerhart, B., 2017. Incentives and pay for performance in the workplace. In: Advances in

Motivation Science. S .l.: Elsevier, pp. 91-140.

Gibbs, M., 2012. Design and implementation of pay for performance. Chicago Booth Research

Paper.

Layard, R., 2011. The case against performance-related pay. [Online]

Available at: https://www.ft.com/content/f2d347bc-6917-11e0-9040-

00144feab49a[Accessed 2 May, 2020].

Mawhinney, T. C., 2019. Pay for performance: History, controversy, and evidence. S .l.:

Routledge.

Miller, G. & Babiarz, K. S., 2013. Pay-for-performance incentives in low-and middle-income

country health programs, s.l.: National Bureau of Economic Research.

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Ogundeji, Y. K., Bland, J. M. & Sheldon, T. A., 2016. The effectiveness of payment for

performance in health care: a meta-analysis and exploration of variation in outcomes.

Health Policy, pp. 1141--1150.

Pettinger, T., 2016. Performance-related pay. [Online]

Available at: https://www.economicshelp.org/blog/20374/labour-markets/performance-

related-pay/[Accessed 2 May, 2020].

Wentworth, D., 2019. Pay for Performance: Show Me the Money. [Online]

Available at: https://www.amanet.org/articles/pay-for-performance-show-me-the-money/

[Accessed 2 May 2020].

List of Figures

1. Fig 1 Empxtrack, 2016 Use a Pay for Performance System: more you work, Better you

are paid, digital image, retrieved from https://empxtrack.com/blog/use-a-pay-for-

performance-system-more-you-work-better-youre-paid/