Performance-Based Compensation
Definition of Performance-Based Compensation
A financial reward system for employees where some or all of their monetary compensation is related to how their performance is assessed relative to stated criteria. Performance related pay can be used in a business context for how an individual, a team or the entire company performs during a given time frame.
Objectives of Performance-Based Compensation
Improving safety
Increasing morale
Increasing Productivity
Advantages and Disadvantages of Performance-Based Compensation
Advantages
Employees are more likely to focus on what they need to do to improve if this is directly linked to pay
Rewarding high performance can assist in retaining staff
It provides a direct incentive for employees to achieve defined work targets
Disadvantages
Employees can be de-motivated if the goals set
are too hard to achieve
It reduces pay equity and can make a company liable to costly equal pay challenges if not operated fairly
Types of individual-based incentive
Merit Pay
Piece work system
Types of team-based incentive
Sales Commission
Goal-Based Incentives
Gainsharing
Rucker Plan
Improshare
Scanlon Plan
Types of organisation-wide incentives
Profit sharing
Employee Stock Ownership Plan (ESOP)
How to implement and effective incentive scheme
Step 3: Develop clear performance goals
Step 4: Determine logistics
Step 2: Determine participants
Step 5: Communicate
Step 1: Determine what the plan intends to accomplish
Step 6: Rinse and repeat