Therefore, periodic performance reviews play a vital role and provide the basis of performance related pay.
Commissions, incentives and bonuses, piece rate pay help the employer to pay the employee according to their productivity and hard work.
The process of performance based pay involves:
Organizations are also designing variable compensation plans for various roles and positions in the organization.
- Deciding and clearly defining the performance goals and the performance measures
- Setting the target bonus for different levels of performances
- Measuring the performance of the employee
- Giving rewards and bonus according to performance
Types of Performance Pay
Although performance related pay has always been a topic of discussions and controversies with many arguments against it, but it has also been proved that performance based pay motivates employees to perform better and earn, and encourages learning, innovation, creativity, problem solving and empowerment which can be facilitated through proper performance measurement and reviews.
- Merit pay – The first step to performance pay, merit pay means setting some basic salary according to the position and the rank of the employee and the variable part of the salary is based on the periodic performance reviews.
- Profit Sharing – Sharing the profits of the enterprise with the employees as bonus.
- Incentives and Performance Bonus – Rewards for special accomplishments or fulfillment of the targets set such as sales commission.
- Gain sharing - Sharing of gains as a result of the increased performance of the employees with them.