Performance Based Pay Pros And Cons

The folllowing sample essay on Performance Based Pay Pros And Cons discusses it in detail, offering basic facts and pros and cons associated with it. To read the essay’s introduction, body and conclusion, scroll down.

Essay on Performance-Based Pay

Organizations pay salaries to their employees based on the type of services rendered. Salary levels rise system is one of the most critical elements in strategic human resource management. This is primarily due to the role played by rewards and compensation system in determining employee productivity.

Rewarding the employee on the basis of his productivity or performance generates enthusiasm and interest within the employee to perform better. Moreover, this approach tends to increase the level of motivation encouraging him to perform better.

An intrinsic part of rewards and compensation strategy is performance management that seeks excellence and high quality work from the work force. The study highlights various theories in relation to performance related pay and associated human resource strategy. The discussion provides an insight into essential features of performance related pay such as motivation, performance management, appraisals, feedback, and learning that play a vital role in creating effective performance related pay strategies.

It also identifies some practical problems faced by managers and strategic alternatives that can effectively meet these challenges.

What is performance related pay?

Performance related pay is the financial compensation paid to an employee based on his work performance. It translates to rewarding employees for effective performance. Bruno Frey (2002) observes in his book Successful Management by Motivation “Variable performance related pay has become an increasingly popular form of compensation.

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The key to performance related pay is that compensation is adjusted to reflect an employee’s individual performance. ” This form of compensation is similar to rewards system adopted by organizations to motivate their work force and extract higher quality work.

Skill Based Pay Advantages And Disadvantages

Performance related pay has been practiced by a large number of organizations since the inception of trade and commerce. The system has now evolved to include identification of measurable parameters while assessing performance, use of positive reinforcement and feedback mechanism to instill confidence within employees, and ongoing training development sessions to equip the workforce to meet operational challenges. Theoretical bases of performance related pay Rewarding an employee with financial compensation is a form of motivation that is intended to increase productivity and encourage others within the organization to strive harder to reach the specified performance targets.

Motivation has been defined as the “driving force that determines the direction and strength of goal-oriented behaviors” (Preker, 2007; pg 240). Performance based pay schemes have failed in many instances to motivate the employees to the desired level of performance. Many explanations have been given for this failure and it is to some extent attributed to the amount of compensation in lieu of the hard work and the management fairness during performance appraisals. Vroom’s expectancy theory and the Adam’s equity theory provide explanation to the fundamental problems faced during the process of deciding the level of compensation.

Pros and Cons of Performance-Based Pay


The first and most important advantage to performance-based pay is that this type of pay is a fantastic motivator. Simply for a worker to get more money, which is the case in nearly every job, he needs to work harder. This pay system is great for retaining key talent the organization has and getting unmotivated individuals to improve productivity. For a sales person, performance- based pay motivates you too sell your product, since it is the only way that you are going to get paid. There is also a feeling of accomplishment when you get your income, its like a reflection of all the hard work you have put in the month or week.

Another advantage to performance-based pay that I think is rather important is that amount of freedom that they might get, (depending where they work). For example, a salesperson would be interacting with customers, he wouldn’t be tied down to a strict schedule or be stuck behind a desk all day. Its also good as you can plan your day around personal appointments, like the dentist or your daughter’s piano recital.

Another great advantage for an organization that offers a performance- based pay scheme would be that it is attractive to workers who are higher skilled than their co workers in the same category of work. For example, if I am an extremely experienced and educated sales rep, and I know I’m better than most people at the job, I want to work in a place that will recognize my talents and will also be reflected in my pay. So the organization will have access to a wider range of more educated and experienced workforce. This is extremely useful for an organization, especially in the current economic climate.

Disadvantage of performance-based pay

A disadvantage of performance-based pay that would contradict my previous advantage would be that motivation isn’t just as simple as money = happiness! Too little money will demotivate but more money will not necessarily increase satisfaction or monivation. (Herzberg) Abraham Maslows hierarchy of needs model of motivation has 5 levels of motivation. 1.physiological 2. Safety 3. Social 4. Self esteem 5. Self actualization. In the there are many other motivators than just financial incentives, like need to belong to a group, to make friends, to work towards job security and to work towards bettering yourself and your career. Once your basic needs are satisfied, other factors start to become more important.

A contrasting view of this would be that, in early careers, some people find themselves working an insane amount of hours, and with a performance- based pay, there may not be a limit to the hours you can work, as you can spend a big amount of time building up a client list. Also if you have a certain sales goal to meet or making up for lost time at that dentist or the piano recital, you can sometimes find yourself working through the weekends or even very late into the evenings. In line with this, another disadvantage would be the financial instability. Your wage or salary cannot be sure. This would increase the tension of the employee. A good way to battle the tension or anxiety caused by performance- based pay would be to have some savings set aside for a rainy day or an emergency or if your performance hasn’t been up to par. This isn’t a great solution but it’s a way to help

A disadvantage that I though went together in relation to my previous advantage (employees) is that employees that are working on the basis of performance- based pay, may only be inclined to actually do what is measured in their performance appraisal. For example, an employee who picks orders for customers in a warehouse for a wholesalers might have a daily goal or picking up to 14% of the orders placed in a day. He may have achieved that goal, but in the process of just meeting the target, he has caused long-term setbacks but ignoring tasks involved in the company, like restocking the shelves, which is not ideal for an organization. Another disadvantage to do with the employees is that this type of pay scheme can cause a split amongst employees. If some employees are not being rewarded as equal it can cause other employees to feel under appreciated or even start to have some resentment towards the employee who is getting the better rewards. This error can occur easily enough as not every single aspect of the job can be monitored. It can be prevented by putting strict and clear stipulations in place for the system.

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Performance Based Pay Pros And Cons. (2019, Dec 07). Retrieved from

Performance Based Pay Pros And Cons
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