Performance-based Compensation - Pay for Performance Essay

2559 Words 11 Pages
Performance-based Compensation - Pay for Performance

Corporations are looking for new ways to improve employee performance as well as remain competitive. Pay for performance is one method some businesses are utilizing to improve employee performance. Performance-based compensation exists when compensation is tied directly to that portion of an individual’s performance that can be effectively measured. There are a number of ways in which this may be accomplished and a number of examples as well how it is applied. One of the oldest examples is taken from the ancient Egyptians, where slaves working in the pyramids were given bread for superior performance. Payment of commission for sales production is one of the methods used today.

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The concept and practical approach for setting up a variable pay program is goal setting, performance threshold and. maximum pay out. Effectively goal-setting a program means closely aligning the needs of the business with the employee’s interest. Present an understandable performance contract between the organization and the employees, tie in contribution and rewards, motivate the employees and enable the company to meet planning budgeting requirements. Set performance goals for each measurement period based on SMART principles. Setting the Performance Threshold – most variable pay programs use a performance threshold, the minimum level an employee must reach in order to qualify for variable pay. The threshold takes into consideration compensation costs which is covered by minimally acceptable outcomes before a company incurs any additional costs. Maximum Pay out- it is a fact that most companies do not calculate their pay-out to performance ratio. The basic formula is calculating the pay-out to performance ratio of the target to the threshold and the maximum to the target utilizing percents of the target. Dependent on what the outcome reveals, it may be advantageous for the manager to meet the target rather than exceed it. There is not a particular formula for assessing the appropriate pay for performance ration. The correction partnership will be a formula that works for one’s organization and is aligned with
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