Performance Appraisal Tutorial | Performance based Compensation

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Performance Based Compensation

Competitive pressures are continually faced by the organizations. They seek to do more with less and do it with better quality.  Organizations have goals for sales volume, profits, innovation, and quality, employment growth is often tightly controlled and in many cases. Subsequently it cuts in employment. Organizations want to accomplish more with fewer employees. Typically, the employee compensation system plays a major role in efforts to manage human resources better.

Employee compensation is at the heart of the employment relationship, being of critical importance to both employees and employers. Employees depend on wages and salaries. They want to further their income and expect for health security. Compensation decisions influence employers’ cost of doing business and thus, their ability to sell at a competitive price in the product market. Compensation decisions influence the employer’s ability to compete for employees to attract and retain. This also reflects their attitude and behavior while working with the employer.

Employee compensation practices differ across employment units on several dimensions. The focus of the employee compensation is to understand why organizations differ on them, and assess whether such differences have consequences for employee attitudes and behaviors and for organizational effectiveness. Pay practices vary significantly across employing units.

First, pay can be in the form of cash or benefits.  Health care has been the fastest growing benefit and most employers describe it as challenging to control this cost while providing quality coverage.

Second, both benefits and cash compensation can be described in terms of their level. Organizations use one or more market pay surveys to help determine what other organizations pay specific jobs in making their own pay level decisions.  To assess competitiveness in the product market, organizations should not focus only on pay levels. They should compare total labor costs.

Third, the structure refers to the nature of pay differentials within an employing unit. Some organizations pay more at entry level and provide relatively slow later and some organizations pay less at entry level and pay more later. Fourth, merit increases become part of base salary and are supposed to depend on performance. An increasing number of organizations are using so-called variable pay or pay at risk, which means that some portion of employees’ pay is uncertain and depends on some combination of future business unit or organization performance Specific pay programs   are merit pay, incentive pay, gain-sharing, profit sharing, and stock plans .

Fifthly, different organizations administer pay differently. The design of pay policies differs in terms of who is involved in the process. The roles of human resource departments, line managers, and rank and file employees differ across situations. In some organizations, line managers may design plans, often with assistance from the human resources department. Alternatively, human resources take the lead in other cases.

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