One of the latest strategies being followed in all sectors through out the world for retention and talent management is “linking compensation to performance”. Commonly known as “Performance pay” or “Performance based pay”, it links the compensation of the employees to their performance and their contribution to the organizational goals. Therefore, periodic performance reviews play a vital role and provide the basis of performance related pay.
Commissions, incentives and bonuses, piece rate pay help the employer to pay the employee according to their productivity and hard work.
- Be prepared with all the details of the performance, the standards, job description and the past appraisals of the employee.
- Clear and unambiguous description of the employee performance should be given in terms of average, above average, good and excellent performance.
- The focus should be on the employees’ behaviour throughout the year and not just his recent performance.
- Quantify the ratings, wherever possible, to ensure easy comparability.
- Substantiate and support your rating, and attach all the necessary documents (if required).
- Apart from the defined performance objectives and results, discuss the related issues as well covering all the aspects of the performance.
When filling the appraisal form, be honest and objective.
The process of performance based pay involves:
- Deciding and clearly defining the performance goals and the performance measures
- Setting the target bonus for different levels of performances
- Measuring the performance of the employee
- Giving rewards and bonus according to performance
Organizations are also designing variable compensation plans for various roles and positions in the organization.
Types of Performance Pay
- Merit pay – The first step to performance pay, merit pay means setting some basic salary according to the position and the rank of the employee and the variable part of the salary is based on the periodic performance reviews.
- Profit Sharing – Sharing the profits of the enterprise with the employees as bonus.
- Incentives and Performance Bonus – Rewards for special accomplishments or fulfillment of the targets set such as sales commission.
- Gain sharing – Sharing of gains as a result of the increased performance of the employees with them.
Although performance related pay has always been a topic of discussions and controversies with many arguments against it, but it has also been proved that performance based pay motivates employees to perform better and earn, and encourages learning, innovation, creativity, problem solving and empowerment which can be facilitated through proper performance measurement and reviews.