What Are the Benefits and Problems of Performance-Related Pay Systems for Both Employees and Employers?

Each employee will be paid based on their capabilities rather than on the characteristics of their job. This will provide an incentive for employees to develop their skills and move into other roles.

Changing to a pay-for-performance pay system always has several implications. The most important of these are discussed in the succeeding paragraphs.

Individual incentive pay plans reward employees for meeting one or a combination of performance standards (e.g. productivity, safety, or attendance) set by the employer (Martocchio. 2013). Piece- rate pay is one of four individual incentive plans offered in the employment industry. Employers have two options to select from when choosing this incentive plan. The first option is compensating the employee hourly for each piece over the given production number. The second option is compensating employees based on established subjective (quality) and objective (quantity) performance standards. In both options the employee is, essentially, being compensated for the work he or she does and not what could have been completed (Gibbons. 1987).  Motivation,

A Performance-Based Pay system is an increasingly popular compensation method used by organizations to increase productivity. A goal for all companies is to try and remain competitive and control costs, this is a reason for performance-based pay systems becoming more popular. This type of system attempts to link compensation to performance. (Gena Richter, 2002) These systems are directly tied to organization or individual performance and are most effective when based on objective measures of quantity or quality of performance. If we wish to have a direct impact on work motivation, it must be linked directly to the performance of desired behaviors. In order for to put this type of system into place, performance evaluations must be conducted regularly , as well as training and development for those with performance that isn't quite up to par. These additional resources will be necessary for our organization if we implement a performance based pay system. (William B. Bernathy, Ph. D., 2004)

Although, person-focused pay programs present many advantages, there are some highly significant disadvantages to person focused pay programs. The main disadvantages are person-focused pay programs can encompass increase in hourly labor, training, and overhead costs, the system's many not connect and interlock well with existing incentive pay systems, they depend on well-designed training programs, and because companies have a problem with determining the monetary value of skills and knowledge (Martocchio, 2013).

I don’t think PFP (pay for performance) is a bad idea in the workplace. However, I feel that employees should be aware that is how they will be paid before they begin work at a company who pays that way. This is fair and the employee knows what they are getting into. Many people are doing their job correctly so working for their pay by PFP is no big deal. My daughter is currently getting paid that way and she is happy at her job and is getting paid well because the customers are leaving wonderful comments about her. It is a personal preference, but do not see a problem with it.

Performance based pay plans are becoming increasingly utilized by companies across all industries as they try to improve their productivity while limiting their costs and remaining competitive. An effective performance based plan allows an employer to distribute some of the financial risk and rewards of the business to the employees. The employer can keep base pay compensation below the market average while still offering employees the opportunity to make more money than what is offered at the high end of the market pay range. This leaves the employer less vulnerable to fluctuations in the economic environment by lowering the fixed cost of wages (Miller, 2011).

It’s essential that managers understand their employees’ perceptions of the importance and fairness of the reward system and then clearly communicate what needs to be done

The goal is pay for performance programs is to reward high performing employees and encourage them to continue the good work.

Pay for performance systems have further been proven to have two advantages for organizations: attracting more high-quality employees and motivating employees to exert more effort at their jobs. (Gordon, Kaswin) This paper will show the positive benefits of performance pay as

Depending on how employees are rewarded for their work, there are four different incentive systems: personal pay, skill pay, bonus based pay, and profit sharing. Of these, PwC PSP utilizes a bonus based pay, which focuses on individual results. Processes, not outcomes, are the important factor. (Burton, et al, 2011)

In order to attract workers and to retain the best performers, employers need to have a compensation system that will achieve these objectives. Furthermore, employers need to comply, with the relevant law which relate to payment systems and hours of work. Payment systems and quantum of payment play a significant role not only for individual employers, but also at the level of society.

O’Neil (1998) suggests six minimal criteria for the design of a performance based pay system. The first of these criteria is that the reward system should be self-funding, that is, the performance increases should as a minimum offset the cost of the rewards provided. The second criterion is that the distribution of the rewards must be consistent, fair and justifiable. In addition reward plans must be transparent and clearly communicated. The third criterion

Pay for performance is to link employees’ salary or salary increase to his or her performance. It seems to be a reasonable or attractive idea but it often does not work well in organizations. Please use at least 4 motivation theories or models to explain why pay for performance may not work as expected—particularly in government and nonprofit organizations.

An incentive pay program can reward employees who continue to produce superior work or encourage employees who already produce good work to best. Sometimes, use an incentive system when employees are lack of enthusiasm of getting down to work and improving things. If everyone in the same job classification gets the same pay, there is no real incentive to do an outstanding job (French, 1990). Various incentive plans used to motivate all employees such as production staff, sales staff, administrative staff and managerial and professional staff on an individual basis. To be improved employee work performance, the incentive pay programs need to be fairly matched with the employees’ expectation. Properly designed and maintained incentive pay program has the potential to increase employees’ productivity and work performance.