Traditionally the remuneration was determined by the Government regulations, experience, minimum wage laws, cost of living and other factors. With the rise of the knowledge industry and the fast pace of changing technology, the need to initiate different ways of motivating the employees to sustain growth and survival became inevitable. “Pay for performance” is a recently developed concept to provide constant motivation to put in their best.

“Pay for performance” is a method of remunerating the performance put in by the individual by granting a share in the profitability of the concern. Better performance means increase in the variable portion of the remuneration; thus accelerating the need for improving his skills and performance.

There are different types of “pay for performance” schemes. Individual-based schemes concentrate on the personal contribution made by the employee. For example, a sales executive is paid a basic pay along with the commission dependent on the sales target achieved by him. The defect of this scheme is that it is dependent on the market for the product or service provided the brand image of the company and other factors which are beyond his capabilities. Ernst and Young, India, follows a system of granting bonuses to individual excellence.

Another scheme based on performance is group-based incentive which is provided to all the employees of the organization. Group-based schemes could be paid equally to all divisions of the concern or could depend on contribution made by each division towards the overall profitability of the concern. Wipro, for example, has the Quarterly Performance Linked Compensation granted to all employees on the basis of the contribution of their division towards the profitability of the company. This improves the co-ordination and teamwork of a division. However, this scheme is also dependent on the general market trends prevalent.

Another group-based system is by granting stock options which has the power of retaining the employees in the long run. Employee stock option schemes are generally granted to all employees. However schemes like Restricted Stock Option Schemes are granted to those employees who show the potential for excellence. Under this scheme the stocks are provided at par, thus hedging the fluctuations in the market. However the gain of the employee who has the option to vest the stocks depends on the current market value of the stock. ESOPs may be of no value if the price of the stock has reduced beyond the vested price.

Performance based variable pay is advantageous to the organization. It helps in the co-ordination of the teamwork towards the attainment of the organisational strategies. Excellent performance by individuals and the team assures quality in the goods and services provided. Similarly employees’ willingness to accept change in the strategies and technology that augments their performance is a sign of success. Enhanced quality of work submitted within shorter time span brings about customer satisfaction and goodwill.

However the performance based scheme has the disadvantage of employee dissatisfaction, especially in a division that does not enjoy market advantage. It is not easy to satisfy the needs of the people. Dissatisfaction in their share can lead to attrition, which turns out to be expensive in the long run. Another disadvantage is a highly volatile economic situation may result reduced income to the workforce.

A performance-based scheme after taking into consideration the general economic state, backed by adequate training to improve the employee performance may turn out to be successful in the long run.