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,
Cited: Billikopf, Gregoria. (2001) Incentive Pay (Pay for Performance). The Regents of the University of California, retrieved from http://www.cnr.berkeley.edu/ucce50/ag-labor/7labor/08.htm The VisionLink Advisory Group, The Five Essentials of Pay for Performance, retrieved from http://www.vladvisors.com/images/PDF/VisionLink_Five-Essentials-Pay-For-Performance.pdf Gordon, A.A., Kaswin, J.L., Effective Employee Incentive Plans: Features and Implementation Processes, Cornell HR Review, 2010, retrieved from http://cornellhrreview.org/2010/05/31/effective-employee-incentive-plans-features-and-implementation-processes/ U.S. Merit Systems Protection Board, (2006) Designing an Effective Pay for Performance Compensation System. Retrieved from http://www.mspb.gov/netsearch/viewdocs.aspx?docnumber=224104&version=224323&application=ACROBAT Delisio, E.R., Pay for Performance: What Are the Issues?, retrieved from http://www.educationworld.com/a_issues/issues/issues374a.shtml