Pay for Performance

Pay for Performance

Definition

Pay for Performance or Performance Related Pay (PRP) is an incentive system that rewards financial payments to individuals according to the level of work they do. This payment fluctuates according to a measurement system of an organization, individual, or team performance. Several organization employers focus on implementing this standard incentive for evaluating their employees and distributing salaries. A prime example of PRP is commission based technique used in sales. The employees are rewarded for selling more products since their commission is variable according to the quantity of orders they accomplish (Milkovich & Newman, 2007).

Does Variable Pay Improve Performance Results?

Throughout America, employers are researching to find creative methods to link performance and pay of employees. Their criterion is to keep an attractive compensation system that remains competitive in the job market. Variable compensation is the solution that is being used in many companies to provide an effective technique to deliver wages according to performance. The method has been gaining recognition due to the relationship of company's success to the internal performance of employees. Sales executives specifically have acknowledged for their commission based compensation that rewards benefits according to the productivity. The role of variable pay is highlighted in the diagram illustrated below (Zall, 2009).

The variable performance system is a creative technique to combine salaries and wages while keeping in order with the business's performance. In its simplest form, increase efficiency of productivity, and achieve higher benefits. The compensation strategy also gives incentive to the rest of the work force who are also interested in higher pay. The strategy provides benefits according to extra efforts performed by an individual alone or by a collaborative team (Abosch & Malague, 2010).

There are various assumptions that are in the background of the variable payment system. These include the fairness in the evaluation of work performance, the financial gains as the primary motivator that encourages individuals and teams to work productively, and higher motivation results in better performance. Each assumption is being discussed concisely in terms of its details and impact on variable pay compensation.

Work Performance Fairness

The primarily problem in organizations regarding variable payment compensation is perception. There are several employees in a company that attribute a pay rise due to favoritism rather than performance. In this regard, the employee who is performing inadequately is using the unjust reason that a person is receiving more compensation for doing nothing while they are working hard. In this situation, the unjust employee reduces his or her productivity since what is the point of working harder when the favorite employee is in any case getting more financial compensation.

Financial Gains & Motivation

In every human resource management book, it is clearly defined the influence of financial incentives on employees as a large motivator. The problem is that not every organization and employee considers this condition. In a particular study on manufacturers, a piecework pay system was evaluated in comparison of fixed income compensation. The study found that no matter what method of compensation was utilized, the performance ...