Performance

management
and
compensation
Dr Rajeshwari Patil
Unit III-
Chapter 4

1
 What is Pay for Performance?

 It is a model where employees are paid based on productivity as opposed to a set salary
or wages paid based on hours worked. Pay-for-performance is common in sales, where
commissions and bonuses are based on sales closed or revenue generated via those
sales.
 In India this model is gaining popularity in emerging sectors like insurance, hospitality
and with a few services organizations where the fixed salary is lower and incentive
programs have higher weightage.
 Indian companies have been linking the performances to pay as a norm where in the
salary packages which the employees are offered, there is a variable component or
bonus which is directly linked to the employees as well as company's performance.
 It works to drive employee engagement and is also effective in boosting top talent
retention.
2
 What is Pay for Performance?

 Pay-for-performance can be grouped into two principle categories: 

 Merit Pay Increases
 These refer to the increases in an employee’s base pay due to high
performance that are typically delivered on an annual basis. They are
often already budgeted for, included as part of the annual salary
increase budgeting process. This is the most used pay-for-performance
model, recognizing employee performance and rewarding top performers
with an increased base salary for the following year.

3
 What is Pay for Performance?

 Variable Pay Programs also called as contingent pay

 Unlike merit pay increases, variable pay programs are often administered multiple times
a year (i.e. once a quarter), and a mix of different programs are often employed.  
 Some variable pays programs include:
 Discretionary Bonuses - These are awarded on an ad-hoc basis to the employees
demonstrating outstanding performance, and often without consideration of pre-defined
goals. This can include:
 Spot bonuses: reward employees “on the spot” for achievements that deserve special
recognition.
 Project bonuses: reward employees for completion or superior completion of a project.
 Retention bonuses: usually awarded to long-tenured employees, or employees in “hot
jobs”, to decrease attrition. 4
 Esop

 An employee stock ownership plan (ESOP) gives workers ownership

interest in the company.
 An ESOP is usually formed to allow employees the opportunity to buy
stock in a closely held company to facilitate succession planning.
 ESOPs encourage employees to do what's best for shareholders since the
employees themselves own stock.
 ESOPs provide companies with tax benefits, thus incentivizing owners to
offer them to employees.
 Companies typically tie distributions from the plan to vesting.

5
 Esop

What are the tax implications of ESOPs?

•Options provided by the company are not taxable.

•Vested options are not taxable.
•When an employee exercises the option of buying shares, the difference between the
market value of the shares and the exercise value of the share will be taxable according to
the tax bracket the employee falls under.
•When an employee sells the shares it is considered capital gains. If the employee sells
the shares within one year 15% tax is levied against the capital gains. If the employee
sells the shares after one year they are considered long term assets and are not taxable.
•If an employee has ESOPs in a company based abroad, when the shares are sold it will
be considered short-term capital gains and will be added to the income of the employee.
The employee will be taxed according to the tax bracket he/she falls into after that.

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Esop

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Esop

www.moneycontrol.com/news/opinion/here-are-esop-taxation-r
eforms-budget-2022-missed-8122101.html