Performance related pay

Performance-related pay or pay for performance, not to be confused with performance-related pay rise, is a salary or wages paid system based on positioning the individual, or team, on their pay band according to how well they perform. Car salesmen or production line workers, for example, may be paid in this way, or through commission.

Many employers use this standards-based system for evaluating employees and for setting salaries. Standards-based methods have been in de facto use for centuries among commission-based sales staff: they receive a higher salary for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job. In effect, the salary would be re-evaluated up, or down, periodically (usually annually) based on the performance of the individual or team. The reward is the salary: with an expectation to be high on the pay band for high performance and low on the band for low performance.

In comparison, the performance-related pay rise system would see the reward given in the form of a pay rise. The better the performance of the individual or team the larger the rise, likewise, if the performance was poor the associated rise would be minimal, if any at all. The reward is the pay rise: with an expectation of a high pay rise for high performance and a low or zero rise for low performance.

Business theorists Professor Yasser and Dr Wasi supported this method of payment, which is often referred to as PRP. Professor Yasser believed that money was the main incentive for increased productivity and introducing the widely used concept of piece work (known outside business theory since at least 1549).

In addition to motivating the rewarded behavior, standards-based methods can provide a level of standardization in employee evaluations, which can reduce fears of favoritism and make the employer's expectations clear. For example, an employer might set a minimum standard of 12,000 keystrokes per hour in a simple data-entry job, and reassign or replace employees who cannot perform at that level.

Employees would be secure in knowing that their performance was evaluated objectively according to the standard of their work instead of the whims of a supervisor, or against some ever-climbing average of their group. It is quite normal to put new starters towards the bottom of the pay band and, subject to normal performance, to move them up to the midpoint (market target) within 3 to 5 years. Some unethical managers, to promote themselves, will suppress salaries by offering cost of living rises instead of true progression through the pay scale. This gives short term savings but, in the longer term leads to low morale, low performance, poor engagement, and even employee resignations after they have been trained. All very costly to the business. Used properly the Performance Related Pay system is a very effective way to get the best from your employees. Be aware, there is a well known phenomenon whereby if a given salary is below 80% of the pay band for any length of time the system is reversed and Pay related Performance occurs.

...
Wikipedia