Entry
Entries A-Z
Subject index
Pay-for-performance Reward Systems
Pay-for-performance reward systems are one of the major types of variable-based pay plans. In compensation terms, the guaranteed salary a person receives in each paycheck is referred to as base pay. Variable pay is a monetary component that is offered in addition to base pay. Thus, variable pay plans, including pay-for-performance, involve money that is at risk of being lost. What distinguishes pay-for-performance reward systems is that the variable pay component is awarded on the basis of individual or group behavior or productivity. Such systems are seen as encouraging the retention of high-performing individuals, although skill-based pay or competency-based pay systems are seen as more consistent with high commitment workforces.
Pay-for-performance, then, is a type of variable pay that is based on behavior, productivity, or the attainment of some other goal of importance to the organization. Pay may be allocated, and also measured, at the individual, group, or organizational level. The award is an additional at-risk (i.e., unlike base salary it is not guaranteed) component that is added to base pay but does not become a part of the calculation of base pay in the future. The questions with pay-for-performance include (1) how to measure work and (2) how to convert this assessment into monetary payouts.
The four basic steps in setting up a pay-for-performance plan include the following:
- Introduction phase: Plan the switch from the old to the new compensation plan
- Design phase: Determine basic design, including consideration of various legal issues
- Formula phase: Determine basic measures and formula for converting performance to money
- Implementation phase: Introduce and communicate plan to employees
Individual Level Pay-for-Performance
Pay-for-performance may be measured and awards made at the individual level. In some ways, this may be thought of as being similar to the older concepts of piece rate, that is, a portion of individual pay is based upon the quantity or quality of individual performance. Performance may be evaluated at the individual level using objective measures of performance, performance appraisals, 360 evaluations, or evaluations of progress toward goals. A matrix is then set up in order to convert performance into pay increments; this matrix may consider simultaneously a number of performance and profitability indicators.
Organizational Level Pay-for-Performance
Pay-for-performance may also be calculated at the team, group, or organizational level and may be based upon metrics, including cost, quality, delivery, waste, production, downtime, and safety. Organizational level schemes often involve participative management and a suggestion system. Some common organizational level pay-for-performance methods include profit sharing, gain sharing, and goal sharing. The actual payout is based on a combination of performance and overall profitability. Employee involvement and trust are key components to a successful organizational-level pay-for-performance plan.
Pay-for-Performance Distinguished from Merit Pay
Both pay-for-performance and merit pay involve rewards for individual performance or productivity. The fundamental difference is in the nature of the pay-outs. With merit pay, the associated wage increase is added to the base salary. Thus, in future years, the base salary is increased by the merit pay award from previous years. With pay-for-performance, the additional pay must be earned or is at risk every year.
...
- Loading...
Get a 30 day FREE TRIAL
-
Watch videos from a variety of sources bringing classroom topics to life -
Read modern, diverse business cases
-
Explore hundreds of books and reference titles
Read next
More like this
Sage Recommends
We found other relevant content for you on other Sage platforms.
Have you created a personal profile? Login or create a profile so that you can save clips, playlists and searches