Performance-Linked Pay

Dhanush Patel L ODileep Kumar C VDileep Masankatti

Categories of pay system

Person Age Seniority/experience Qualifications Competence Behaviour/traits Attitudes Knowledge Skills

PerformanceIndividual Commission Piecework Individual performance-

related pay/merit bonus

Group Profit-sharing Gain-sharing Team bonuses

Introduction

Performance-Linked pay or pay for performance is money paid relating to how well one works.

Sales staff receive more pay for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job.

Many employers use this standards-based system for evaluating employees and for setting salaries.

Performance-Linked pay programs Merit pay Incentive pay Profit-sharing Ownership Gain-sharing Group incentives and Team awards

Merit pay programs

Annual pay increases are usually linked to performance appraisal ratings.

Merit increase grid A grid that combines an employee’s

performance rating with his/her position in a pay range, to determine the size and frequency of his/her pay increases.

Criticisms of traditional merit pay programs It is unfair to rate individual performance. The individual focus of merit pay

discourages team work. Exclusive reliance on supervisor for

performance ratings may restrict accuracy. If merit increases are too small, they will not

motivate workers. Merit pay may lead to an ‘entitlement

mentality’.

Individual incentive programs

Individual incentives reward individual performance, but differ from merit pay. Incentives are not rolled into base pay.

They must be continuously earned. Performance is usually measured as

physical output, rather than by subjective ratings.

Profit sharing  A group compensation plan in which

payments are based on a measure of organization performance (profits) and do not become part of the employees’ base salary.

Ownership Stock option. An employee ownership plan

that gives employees the opportunity to buy the company’s stock at a previously fixed price.

Employee stock ownership plan (ESOP). An employee ownership plan that provides employers certain tax and financial advantages when stock is granted to employees.

Gain-sharing, group incentives and team awards

Gain-sharing  A form of group compensation based on group

or plant performance (rather than organization-wide profits) that does not become part of the employee’s base salary.

Group incentives Tend to measure performance in terms of

physical output.Team awards

Use a broader range of performance measures (e.g. cost savings, meeting deadlines).

Performance Measurement Method

Balanced scorecard A means of performance measurement

that gives managers a chance to look at their company from the perspectives of internal and external customers, employees and shareholders.

PLP vs other financial remuneration PLP vs salary

Salary is paid for the efforts that one puts in and PLP is paid for the results. Salary is paid in short, definitive cycles (e.g., weekly, monthly, fortnightly etc.) while PLP is paid in a longer cycle of monthly, quarterly or half-yearly, yearly.

PLP vs bonus Bonus is paid for the performance of the organization while PLI is

paid for the individual's performance. Bonus is normally paid yearly or half-yearly. This is normally paid as a percentage of one's salary, or as a fixed amount, irrespective of the employee's individual performance.

PLP vs retention bonus Some organizations give a retention bonus which is payable for the

period that an employee stays back in the organization. This is paid for the value added by the employee by virtue of mere presence and not necessary for the efforts or work output. Normally retention bonus is paid yearly or half-yearly which will make the employee to stay back in the organization.

The pros and cons of performance pay

Arguments for: It is right that those who perform better receive

higher rewards than those who perform less well. Linking pay to performance improves motivation

and hence performance. Performance-linked pay can send strong messages

about what behaviour is expected.

The pros and cons of performance pay

Arguments against: Pay is not a motivator. It demotivates staff who do not benefit. It ruptures relationships and team work. It represents a diversion from managing staff

performance properly. It discourages risk-taking. It undermines the intrinsic interest in the work.

Summary Performance-Linked pay programs vary as to

whether they link pay to individual, group or organization performance. A balance of individual, group and organisation objectives may be sought.

An effective pay strategy can have a substantial, positive impact on an organization's success.

The importance of pay means that employees care a great deal about the fairness of the pay process. Pay programs must be explained and administered in such a way that employees understand their underlying rationale and believe it is fair.

Bibliography http://en.wikipedia.org/wiki/Performance

-linked_incentives http://en.wikipedia.org/wiki/Performance

-related_pay De Cieri & Kramar, “Human Resource

Management in Australia: Strategy-People-Performance”