Pay for Performance

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Pay for Performance

Park University

Overview
Incentive pay, also known as "pay for performance" is generally given for specific performance results rather than simply for time worked. While incentives are not the answer to all personnel challenges, they can do much to increase worker performance. (Billikopf) Performance pay has various names: merit pay, pay for performance, knowledge-and-skill- based pay, or individual or group incentive pay. (Delisio) 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 well as some steps to implement the pay for performance program. Productivity Implications

Companies that have switched from salaries to individual incentives have increased productivity dramatically—some by as much as 44 percent. Linking pay to performance not only motivates but also helps to recruit and retain the most talented employees. New graduates seek to join organizations that make use of performance-related rewards, and they have long-term loyalty to these organizations. The use of performance pay has also grown in popularity, as 67 percent of companies offer some form of performance pay to employees below the executive level. Likewise, the practice of compensating managers below the senior executive level with stock options and other forms of long-term incentives has risen dramatically. This is because performance-sensitive pay aligns the interest of all levels of employees with the interests of shareholders. (Gordon, Kaswin) Implementing a pay for performance system has been shown to resolve organizational problems because it aligns the preferences of firms and employees. In addition, creating a pay for performance system serves as a sorting mechanism to identify and attract the most capable employees. (Gordon, Kaswin) The economic downturn has accentuated the need to contain compensation costs by holding down fixed-based salary expenses. To maintain competitive pay plans, an increasing number of companies are giving more employees across different job functions the opportunity to earn variable, performance-driven incentives for achieving individual and organizational goals. (Gordon, Kaswin) Pay for Performance Objectives

Developing a pay for performance philosophy and strategy is easier when we understand what such an approach is intended to achieve.  If effectively constructed, pay for performance compensation plans should help a company fulfill the following objectives: * Recruit and retain the highest quality employees

* Communicate and reinforce the values, goals and objectives of the company * Engage employees in the organization's success
* Reward contributors for successful achievements
(The VisionLink Advisory Group)

Line of Sight
Ultimately, the combination of rewards strategies that a company institutes should help to

draw a correlation in the mind of the employees between interdependent elements: * Vision - where is this company going?
* Strategy - how is it going to get there?
* Roles and Expectations - what role does each key person have in that strategy and what is expected of him or her in that role? * Rewards - how will each employee be financially rewarded for the achievement of the expectations associated with his or her role   Pay for performance is the mechanism that is used to create this "line of sight" between related elements of company culture and purpose.  In the final analysis, compensation needs to reinforce the behaviors that are desired within the strategy framework of the company in a way that is compelling enough to produce the desired performance.  (The VisionLink Advisory Group) In adopting a rewards philosophy for how people will be remunerated for their contributions within an...
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