Performance-based pay systems provide financial compensation based on either focus on individual or group performance. Below introduces this common HR concept and the associated advantages and disadvantages.
Performance Pay Systems
There are different types of payment schemes that apply to performance pay systems, which are designed to distribute financial rewards to employees. In contrast with set salaries, performance pay is based on compensating the employee per their individual contribution, not the value of the position itself. There is individual performance pay, which is often associated with sales personnel who depend on commissions, and skill-based pay, in which compensation is connected to competency. Some companies engage in profit-sharing, which means that employees will receive a certain percentage of the company’s financial gains.
Skill-Based Overview
Many manual labor and manufacturing companies favor skill-based pay systems that link aptitude and expertise to pay grades. This promotes productivity, better workforce skills and product quality. There are two types of skill-based payment systems. First, there are general skill systems that increase the employee’s ability to perform more tasks and positions. Second, there are specialized skill systems that compensate employees for master’s highly difficult tasks. An employee who learns how to operate similar machinery would be rewarded through the general skill system; an employee who learns an entirely new machine would be incentivized through a specialized skill system.
The Benefits
Performance pay offers a variety of benefits. Management enjoys better employee performance and employee engagement. As long as there is a fair and effective performance review system that is accurately aligned with local salary levels, employees will strive to work hard. Executives will enjoy increased revenue and working capital. Management can use performance pay systems to transition model employees into supervisors. HR administrators can use performance pay to attract potential job applicants and improve employee retention. In the beginning, turnover rates may be slightly higher as low performers leave, but qualified and motivated employees will remain.
The Disadvantages
Some companies struggle to implement performance pay systems because it is hard to define performance levels and objectively evaluate employees. The performance criteria and measurements may be vague and inadequate. As a result, supervisors favor certain employees over others, which increase collective employee dissatisfaction. When employees cannot understand the performance measures, they may still blame management when they fail to receive wage increases. Sometimes, the objective of performance appraisal systems is to merely identify training needs or promotion suitability. The biggest challenge of performance pay systems is that management must continually observe and document employee performance while also providing feedback, which is very time consuming.
The Performance Criteria
The actual pay scheme will determine the performance criteria, which may be based on individuals, groups, the organization or a customized mixture. Some individual-based criteria focus on the achievement of personal goals and the supervisor’s feedback. Individual training goals may be based on specific skills and knowledge needed to perform work duties. Individual performance systems are not recommended when the company’s objective is to increase teamwork performance and information sharing. Other systems utilize peer reviews, which are often considered to be highly subjective.
To learn more about performance-based pay, visit the website of the Society for Human Resource Management (SHRM).
See also: Are Employee Performance Reviews Effective?
1. Pay for Individual Performance
Organizations may reward individual performance with incentives such as piecework rates, standard hour plans, merit pay, individual bonuses, and sales commissions. These alternatives are summarized in Figure
Facts
INDIA: Defence Minister A K Antony in a report to Parliament upper house disclosed that 637 scientists have resigned from the Defence Research and Development Organisation (DRDO) during the period of 2007-2011, most of them were younger scientists who resigned. Better incentives, better increments and promotions are few main reasons behind the resignation of scientists from DRDO. defence Minister said "corrective measures " had been put in place "to stem the flow of resignations". The government has planned to grant performance related incentive scheme to DRDO scientists, on par with the similar organisations.
Source: TOI, 6-12-2012
Facts around the world
A recent WorldatWork survey of more than 6,000 managers and employees in 26 organizations in North America found that many employees and managers do not understand why they get paid what they do. Forty percent reported as knowing what to do to increase their base pay. Only thirty-eight percent reported knowing how to increase the size of their cash bonus.
2. Piecework Rates
As an incentive to work efficiently, some organizations pay production workers a piecework rate, a wage based on the amount they produce. This rate is often paid in addition to employees' base pay. The amount paid per unit is set at a level that re-wards employees for above-average production volume. For example, suppose that on average, assemblers can finish ten components in an hour. If the organization wants to pay its average assemblers $12 per hour, it can pay a piecework rate of $12 per hour divided by 10 components/hour, or $1.20 per component. An assembler who produces the average of 10 components per hour earns an amount equal to $12 per hour. An assembler who produces 12 components in an hour would earn $1.20 x 12, or $14.40 each hour.
Women worker working for piecework rate at flowers nursery. Normally piecework rate is paid daily to workers in most cases, but some employers pays at certain intervals like for weekly or monthly. It all depends upon the understanding between workers and employer.
An obvious advantage of piece rates is the direct link between how much work the employee does and the amount the employee earns. In spite of their advantages, piece rates are relatively rare for several reasons.
Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate performance measure. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. For complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well. Also, unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer satisfaction if it interferes with the day's output.
2. Standard Hour Plans
Another quantity-oriented incentive for production workers is the standard hour plan, an incentive plan that pays workers extra for work done in less than a preset "standard time." The organization determines a standard time to complete a task, such as tuning up a car engine. If the mechanic completes the work in less than the standard time, the mechanic receives an amount of pay equal to the wage for the full standard time. Suppose the standard time for tuning up an engine is two hours. If the mechanic finishes a tune-up in 1 1/2 hours, the mechanic earns two hours' worth of pay in 1 1/2 hours. Working that fast over the course of a week could add significantly to the mechanic's pay.
Payment according to standard our plan is mostly seen in areas where there is daily labour intensive. Daily labour will be paid according to the hours he has worked. Standard our plan for payment of wages is being used in the field of construction, agriculture sector and in the areas where more manual labour is required.
In terms of their pros and cons, standard hour plans are much like piecework plans. They encourage employees to work as fast as they can, but not necessarily to care about quality or customer service. Also, they only succeed if employees want the extra money more than they want to work at a pace that feels comfortable.
3. Merit Pay
Merit pay refers to the process of determining employee compensation (base salary or bonuses), in part, on the basis of how well each employee performs at work. The principle is simple, at least in theory. It makes sense to reward more productive employees for their increased contributions to the organization, in the interests in fairness, but also with an eye to trying to retain the best employees in a company.
Almost all organizations have established some program of merit pay—a system of linking pay increases to ratings on performance appraisals. (described the content and use of performance appraisals.) Merit pay is most common for management and professional employees.
A drawback of merit pay, from the employer's standpoint, is that it can quickly become expensive. Managers at a majority of organizations rate most employees' performance in the top two categories (out of four or five). Therefore, the majority of employees are eligible for the biggest merit increases, and their pay rises rapidly. This cost is one reason that some organizations have established guidelines about the percentage of employees that may receive the top rating.
Another drawback of merit pay is that it makes assumptions that may be misleading. Rewarding employees for superior performance ratings assumes that those ratings depend on employees' ability and motivation. But performance may actually depend on forces outside the employee's control, such as managers' rating biases, the level of cooperation from co-workers, or the degree to which the organization gives employees the authority, training, and resources they need. Under these conditions, employees will likely conclude that the merit pay system is unfair. The HR How-To box suggests ways to set up a merit pay system so that is maximizes the advantages of this type of pay while minimizing the drawbacks.
Advantages of Merit Pay
These are reasons why you might want to consider merit pay.
Allows the employer to differentiate pay given to high performers.
Merit pay helps an employer differentiate between the performance of high and low performing employees and reward the performance of the higher performers.
Merit pay, unlike profit sharing or similar bonus pay schemes, allows an employer to differentiate between the performance of the company as a whole and the performance of an individual. While many merit pay programs also provide an overall reward that is distributed to all employees, to promote such values as team work, a portion of the available compensation is reserved for strong performers.
Merit pay also provides a vehicle for an employer to recognize individual performance on a one time basis. This is useful for rewarding employees who may have participated in a one-time project such as implementing a new HRIS or opening up a new sales territory.
4. Performance Bonuses
Like merit pay, performance bonuses reward individual performance, but bonuses are not rolled into base pay. The employee must re-earn them during each performance period. In some cases, the bonus is a one-time reward. Bonuses may also be linked to objective performance measures rather than subjective ratings. Bonuses for individual performance can be extremely effective and give the organization great flexibility in deciding what kinds of behaviour to reward.
Cognizant Rewards employees with 200% variable payout
INDIA: After growing faster than Indian information technology (IT) industry, Cognizant Technology Solutions Corp has now rewarded its employees by giving out as much as 200% of the variable components of their 2011 salaries.
Typically, anywhere from 20 to 30% of an employee salary is labelled as variable pay, linked to a combination of overall company performance and individual performance.
"The company has done the repeat of 2010 in rewarding its top performers. The top performers got around 200% of their target bonus while the average bonus given was 150%. The bonuses were on expected lines as the company has been scoring good quarter on quarter," said a Cognizant employee in Chennai on condition of anonymity.
//economictimes.indiatimes.com/jobs/cognizant-rewards-employees-with-200-variable-payout/articleshow/12234757.cms?from=mdr
5. Sales Commissions
A variation on piece rates and bonuses is the payment of commissions, or pay calculated as a percentage of sales. For instance, a Insurance policy salesperson might earn commissions of 5 percent on the amount of the insurance policy of an insured person by him. Selling a 100000 worth Insurance policy will earn 5000/- commissions for the Salesperson. At most organizations today, commissions range from 5 to 20 percent of sales. 21 In a growth-oriented organization, sales commissions need not be limited to salespeople. Many of the technical experts at Scientific &. Engineering Solutions are eligible for commissions and bonuses tied to the profitability of the sales they help to close. The HR How-To box provides additional suggestions for incentive pay.
Perform and get paid: Public sector banks plan to link pay with performance
Jul 28, 2018,
Senior management of public-sector banks (PSBs) may now have to perform to earn more. In a first-of-its-kind move for PSBs, State Bank of India, Punjab National Bank and Bank of Baroda (BoB) are planning to introduce performance-linked salary structure for the senior management, according to a Business Standard report. The bank is seriously thinking of introducing a system of performance-based incentives for officers above the general manager grade. There will be a component of fixed and variable pay. But it will evolve slowly. SBI and BoB may also follow a similar model and are working on a compensation framework. Performance-linked pay is widely used in the private sector to reward the better performers in the system. The absence of any incentives in the government along with time-bound promotions, irrespective of performance, are seen as major dampeners in the current system.
In 2015, the government approved payment of performance-related pay to executives and non-unionised supervisors of Coal India Ltd (CIL) and its subsidiaries.
The Seventh Pay Commission (SPC) recommended performance-linked pay for all central government employees, but suggested that each department be given the flexibility to work out its own matrix. The panel suggested that the incentive could be in the form of a "non-additive cash component" of their current pay, paid at the end of the fiscal year and should not be linked to savings. Performance-linked pay has been proposed by previous pay panels as well as the administrative reforms commission. The PSBs would need approval from the government for introducing performance-linked salary structure. The pay and allowances of different levels of employees at PSBs are usually decided through settlements between the Indian Banks’ Association, the bank’s management and trade union body United Forum of Bank Unions.
//economictimes.indiatimes.com/industry/banking/finance/banking/perform-and-get-paid-public-sector-banks-plan-to-link-pay-with-performance/articleshow/65173510.cms?from=mdr
//www.economicsdefinition.com