Pay for performance refers to a pay strategy where evaluations of individual and/or organizational performance have significant influence on the amount of pay increases or bonuses given to each employee.
When a pay for performance system functions properly,
- The greatest rewards will be received by the outstanding performers to acknowledge their superior contributions and to motivate them to continue high performance.
- Substantially smaller raises will be received by average performers, which may encourage them to work harder to achieve larger raises in the future.
- No increase will be received by poor performers, which is intended to persuade them to improve their performance or leave.
The motivational ability of money to improve individual or organizational performance cannot always be relied on. More employees are motivated by factors, such as “personal pride or satisfaction in my work” or a “personal desire to make a contribution” rather than a “monetary award.” Additionally, conditions in the work environment have created a rather tenuous link from pay to performance.
Focusing on pay in “pay for performance” may be misleading. Rather than concentrating entirely on the monetary benefits, individuals may be more likely to join and stay with organizations where they witness effective supervisory practices. This creates an environment where employees are more likely to have a sense of accomplishment and satisfaction.
Agencies often have many objectives for pay for performance. They may aim to improve the organization’s ability to attract and retain high performers and hope to improve individual effort and consequently, organizational performance. They may also be searching for a fairer way to pay for their contribute to the organization.
Researchers have found that pay for performance has not achieved these objectives in all instances. The effectiveness of a pay for performance system can be undermined by flaws in the design, implementation, and operational phases. The performance evaluation system must be accurate and supervisors must be well-versed in its use. Checks and balances should be built in to help hold supervisors accountable for their decisions. At last, the pay for performance system must be evaluated on an ongoing basis to detect when changes are needed. These requirements and are discussed in the following section.