Performance Related Pay

• A financial reward system for employees where some or all
• of their monetary compensation is related to how their performance
• This performance is based according to a stated criteria
• For example workers are paid a bonus when they achieve a certain level of production or when the quality of products meet/exceeds a certain quality level
• It is also known as performance linked pay
• Examples of performance related pay include the payment of commissions and bonuses
• The piece rate system also falls under performance related pay

Advantages

• It provides a direct incentive for employees to achieve the defined business objectives/targets
• Rewards employees who work towards set goals
• Results in the development of a compliance culture within the organisation
• Encourages employees to come up with efficient ways to achieve the organization’s goals
• Helps to improve worker vigilance and reduces supervision costs
• Can be used as a motivational tool
• Helps the organisation to retain the most skilled and best staff
• It’s an effective way of dealing with poor performance
• Helps with communicating the goals to the entire organisation

Disadvantages

• It reduces equity in terms of pay as different individuals will earn different compensation for the same job/tasks
• Can hinder cooperation and teamwork as individuals focus on their own performance instead of the team’s performance
• Only rewards employee for certain aspects of performance e.g. the piece rate system focuses on quantity which may come at the expense of quality
• Employees can be demotivated if the set goals are too high
• Employees and employers will focus on financial gains instead of their own their development
• Not all jobs or tasks can be reduced to simple performance standards
• Performance Appraisal is a judgement based assessment method it is difficult to objectively measure performance
• Recognises performance and not effort
• Can lead to clashes with Trade Unions
• Can be costly to implement
• It can be difficult to translate performance into pay
• Makes costing difficult
• Makes financial planning difficult
• It is difficult to understand how payment is calculated

To access more topics go to the O Level Business Notes page.