compensation Management

1. Session on 12
MBA
Topic:
Rewarding and reviewing contribution
and performance

4. Individual contingent pay
Individual contingent pay is the term used to
describe schemes for providing financial rewards
that are related to individual performance,
competency, contribution or skill.
Contingent pay may be made available in the
form of consolidated increases to base rates or
by cash bonuses (variable pay or ‘pay at risk’) or
a combination of the two

5. This chapter deals with contingent pay
under the following headings:
1. Individual Contingent Pay Defined;
2. The Incidence Of Contingent Pay;
3. Contingent Pay As A Motivator;
4. Arguments For And Against Contingent Pay;
5. Criteria For Success;
6. Performance-related pay;
7. Competency-related pay;
8. Contribution-related pay;
9. Skill-based pay;
10. Service-related pay;
11. Choice of approach;
12. Readiness for contribution pay;
13. Developing and implementing contingent pay.

7. INDIVIDUAL CONTINGENT PAY
DEFINED
Individual contingent pay
schemes other than service-
related systems are based on
processes for relating pay to
performance, competence,
contribution or skill.

8. THE INCIDENCE OF CONTINGENT PAY
The e-reward 2004 Survey of Contingent Pay (1)
established that 189 schemes were used by the 100
respondents in the following proportions:
1. performance-related pay – 65 per cent;
2. contribution-related pay – 33 per cent;
3. service-related pay – 15 per cent;
4. competence-related pay – 8 per cent.

9. CONTINGENT PAY AS A MOTIVATOR
• HOW CONTINGENT PAY IS AS A MOTIVATOR?

10. CONTINGENT PAY AS A MOTIVATOR
Many people see contingent pay as the best
way to motivate people. But it is simplistic to
assume that it is only the extrinsic motivators
in the form of pay that create long-term
motivation.
Incentives and rewards
Financial incentives
Financial rewards

11. Financial incentives
Financial incentives are designed to provide
direct motivation. They tell people how much
money they will get in the future if they
perform well – ‘Do this and you will get that.’
A shop floor payment-by-result scheme and
sales representative’s commission system are
examples of financial incentives.

12. Financial rewards
• Financial rewards act as indirect motivators
because they provide a tangible means of
recognizing achievements, as long as people
expect that what they do in the future will
produce something worthwhile.
• ‘You have achieved this, therefore we will pay
you that.’

13. ARGUMENTS FOR AND AGAINST
CONTINGENT PAY
Arguments for
The most powerful argument for contingent pay is that those who contribute
more should be paid more. It is right and proper to recognize achievement
with a financial and therefore tangible reward.
• to recognize and reward better performance;
• to attract and retain high-quality people;
• to improve organizational performance;
• to focus attention on key results and values;
• to deliver a message about the importance of performance;
• to motivate people;
• to influence behaviour;
• to support cultural change.

14. The main arguments against contingent pay are that:
• the extent to which contingent pay schemes motivate is
questionable – the amounts
available for distribution are usually so small that they cannot
act as an incentive;
• the requirements for success are exacting and difficult to
achieve;
• money by itself will not result in sustained motivation – as
Kohn (3) points out, money rarely acts in a crude,
behaviourist, Pavlov’s dog manner;
• numbers who are motivated;
Arguments against

15. people react in widely different ways to any form of
motivation – it cannot be assumed that money will
motivate all people equally yet that is the premise
on which contribution pay schemes are based;
financial rewards may possibly motivate those who
receive them but they can demotivate those who
don’t, and the numbers who are demotivated could
be much higher than the

16. employees can be suspicious of schemes
because they fear that performance bars will be
continuously raised; a scheme may therefore
only operate successfully for a limited period;
schemes depend on the existence of accurate
and reliable methods of measuring
performance, competence, contribution or skill,
which might not exist;

17. contingent pay decisions depend on the
judgement of managers, which in the absence of
reliable criteria could be partial, prejudiced,
inconsistent or ill informed;
the concept of contingent pay is based on the
assumption that performance is completely
under the control of individuals when, in fact, it
is affected by the system in which they work;

18. contingent pay, especially
performance-related pay
schemes, can militate
against quality and
teamwork.

19. CRITERIA FOR SUCCESS
Individuals should have a clear line of sight between
what they do and what they will get for doing it.
Rewards are worth having.
Fair and consistent means are available for measuring
or assessing performance, competence, contribution
or skill.
Five criterion for effective contingent pay

20. People must be able to influence their
performance by changing their behaviour
and developing their competences and skills.
The reward should follow as closely as
possible the accomplishment that generated
it.

21. 1.Effort
2.Perform
ance
3.Results
4.Measur
es
5. Pay-out
Line-of-sight model

22. 1.
Agreed
Outcomes
(targets)
2.
Performa
nce
measures
3.
Performan
ce
4.
Rating
5.
Formula
6.
Performan
ce pay
PERFORMANCE-
RELATED PAY

23. CONTRIBUTION-RELATED PAY
Contribution-related pay is a process,
taking into account all aspects of a
person’s performance .
‘Performance means both
behaviours and results.

24. WHAT IS SKILL-BASED PAY?

25. SKILL-BASED PAY
Skill-based pay provides employees with
a direct link between their pay
progression and the skills they have
acquired and can use effectively.
It focuses on what skills the business
wants to pay for and what employees
must do to demonstrate them.

26. WHAT IS SERVICE-
RELATED PAY?

27. SERVICE-RELATED PAY
Service-related pay provides fixed
increments that are usually paid
annually to people on the basis
of continued service either in a
job or a grade in a pay spine
structure.