One of the latest strategies being followed in all sectors through out the world for retention and talent management is “linking compensation to performance”. Commonly known as “Performance pay” or “Performance based pay”, it links the compensation of the employees to their performance and their contribution to the organizational goals. Therefore, periodic performance reviews play a vital role and provide the basis of performance related pay. Commissions, incentives and bonuses, piece rate pay help the employer to pay the employee according to their productivity and hard work.
The process of performance based pay involves:
Deciding and clearly defining the performance goals and the performance measures
Setting the target bonus for different levels of performances
Measuring the performance of the employee
Giving rewards and bonus according to performance
Organizations are also designing variable compensation plans for various roles and positions in the organization.
Types of Performance Pay
Merit pay – The first step to performance pay, merit pay means setting some basic salary according to the position and the rank of the employee and the variable part of the salary is based on the periodic performance reviews.
Profit Sharing – Sharing the profits of the enterprise with the employees as bonus.
Incentives and Performance Bonus – Rewards for special accomplishments or fulfillment of the targets set such as sales commission.
Gain sharing - Sharing of gains as a result of the increased performance of the employees with them.
Although performance related pay has always been a topic of discussions and controversies with many arguments against it, but it has also been proved that performance based pay motivates employees to perform better and earn, and encourages learning, innovation, creativity, problem solving and empowerment which can be facilitated through proper performance measurement and reviews.