Benefits and Drawbacks of Performance-Based Compensation
posted by Pat Wootton on December 3, 2011
In our parents' day, salary was generally based on seniority; every employee in a comparable position earned the same, with annual increments and cost-of-living raises. Seniority was rewarded, youthful enthusiasm perhaps not. The obvious drawback to this system was a tendency for long-standing employees to become comfortable with their guaranteed salary and become less motivated. Additionally, there was little incentive for younger - possibly more ambitious and energetic - employees to shine since all they would receive as a reward for their efforts would be a pat on the back and the satisfaction of a job well done unless they shone brightly enough to be awarded a promotion. Performance-based pay would therefore seem to present a far better deal for both employers and employees. Rewarding the best performers seems only reasonable and is obviously the clear way to motivate employees. So is performance-based compensation the best way forward for most companies? Businesses involving sales have had a kind of performance-based pay structure for decades; their salespeople are rewarded with commissions, the more sales - the more commissions earned. However many other industries have instituted similar pay structures, some successfully, some less so. The benefits of performance-based pay structures are self-evident. There is a positive correlation between effort and performance and employee retention is likely to be enhanced since those who perform best, being rewarded for their efforts, are more likely to stay. Some companies have used a performance-based compensation scheme to not only reward their high achievers but also to weed out their weakest performers; good for company performance perhaps, maybe not so good for morale. There may well be an argument for cutting out the 'deadwood' in an organization as opposed to educating and motivating these employees but that...
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