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What Does "Pay for Performance" Mean?

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  • Written By: Helen Akers
  • Edited By: Jessica Seminara
  • Last Modified Date: 07 November 2016
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Pay for performance is typically a financial incentive employees receive for meeting a certain performance objective or target. Companies use this type of system to motivate employees to achieve results that increase profits or improve service. Examples of incentives might include bonuses for perfect attendance, meeting a certain service quality target, and achieving a specific sales growth target. Incentive payments are usually added on to an employee's regular salary or hourly pay, but may comprise the majority of earnings in certain professions.

Compensation for sales representatives usually falls under the pay for performance concept. Commissions earned are directly related to the amount of sales volume that a representative is able to achieve. While not all sales positions pay the same way, some pay structures in this profession are primarily based on sales results. In addition, there may be additional bonuses for achieving a certain level of sales volume within a specified period.

The main idea behind this payment concept is to create a direct link between an employee's job performance and the amount of pay he earns. In short, the more he produces, the more financial reward he reaps. In addition to cash bonuses and commissions, there are other types of pay for performance incentives that companies use, such as extra vacation or personal time off.

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Companies that implement pay for performance plans do so in the hopes that it will motivate employees to perform at higher levels. The trade-off between the costs of the incentive programs and the higher performance results is usually in favor of the employer. On the downside, incentive payments can instill a sense of competition and do not always motivate employees who are not driven by increased monetary rewards.

Incentives such as extra vacation or personal time might have a greater appeal to employees who are motivated by work-life balance. Some employees prefer the ability to occasionally work part-time for full-time pay. Others enjoy formal recognition or the chance to take on additional responsibility. Companies may implement innovative solutions that reward high-performers with paid lunches at a local restaurant, in addition to monetary bonuses.

Incentives are often advertised internally to motivate workers. Various bonus levels may be created to encourage employees to stretch their abilities and personal goals. Pay for performance isn't a guarantee that employees will perform better or meet the higher objectives, especially if they are somewhat unrealistic or very difficult to obtain. In this case, employees may become frustrated when their results do not consistently meet the higher standards and they do not qualify for the increased rate of pay.

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bythewell
Post 3

@croydon - That's the problem with schemes like the ones proposed for teachers where pay for performance will determine their salaries. They are based entirely on individual measurements without taking individual circumstances into account. Which means that teachers will have every incentive to try and get a class of advanced students without learning difficulties in order to get the bonuses that will come along with that. And the students who need the best teachers will end up with the worst ones because they won't be good enough to get the better paying jobs.

I just don't think there should be incentives like this. Or, if there are, they should be a carrot at the beginning of the process, in that all teachers are paid well, like doctors are, and only the best are allowed to become teachers in the first place.

croydon
Post 2

@pleonasm - It really does depend on what kind of workplace and what kind of incentives we're talking about though. I think keeping them flexible is important. It shouldn't just be about numbers and maybe it shouldn't be about individual performance either. But if you're in a low-pay, low-interest job then it can really help to know that working a little bit harder might improve your situation.

pleonasm
Post 1

I actually think that performance management would be better off without these kinds of incentives. If you've hired a decent person and they are happy with their job, then they should be working hard anyway. Putting incentives into the mix and creating stress and competition is just going to hurt their work.

I mean, if the incentive is a good one, it will have to be something they need, which means that they are going to concentrate on that rather than on doing the best job they can. In sales, that might mean pushing people into buying things instead of trying to help them get what they need and giving them a good experience so they will come back to the store again.

In the short run it might improve individual performance, but overall it creates a bad climate in the workplace.

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