2. Categories of pay system
Person
Age
Seniority/experience
Qualifications
Competence
Behaviour/traits
Attitudes
Knowledge
Skills
Performance
Individual
Commission
Piecework
Individual performancerelated pay/merit bonus
Group
Profit-sharing
Gain-sharing
Team bonuses
3. 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.
5. 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.
6. 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’.
7. 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.
8. 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.
9. Gain-sharing, group incentives and
team awards
Gain-sharing
A form of group compensation based on group
or plant performance (rather than organizationwide 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).
10. 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.
11.
12. PLP vs other financial remuneration
PLP vs salary
PLP vs bonus
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.
Bonus is paid for the performance of the organization while PLI is paid
for the individual's performance. Bonus is normally paid yearly or halfyearly. 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.
13. 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.
14. 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.
15. 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.
