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.
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.