Performance Based Pay
What is Performance-Based Pay?
Performance-based pay is a payment system linking wages to productivity or the amount of employee output. Businesses often use it to incentivize employees to increase productivity, depending on how well the employee performs what is expected of them. According to Raphael Avraham Sternberg, it is a system based on the outcome of the employee’s work, not the performance itself. It is a system that rewards employees for their performance rather than the amount of time or money spent doing it.
How does it work
Sternberg explains that performance-based pay is a type of wage structure that rewards employees for their “output” rather than their time. The formula used to create these wages relies on factors such as:
Planning and decision making
Quality and quantity of work
Time spent working as well as the amount of money spent on it.
1. Planning and decision making
Here, Sternberg explains that performance-based pay is measured by the level of input and output produced by an employee. The formula used to calculate this is based on the ratio between what an employee produces and how much time they spend handling it.
2. Quality and quantity of work
This depends on how well a person can perform what they’re supposed to do and also how much effort they put in. This value is based on the amount of input an employee uses and how much output it produces.
3. Time spent working and money spent on the job
This is the most important point covered by Sternberg. The calculation of performance-based pay relies on the amount of time an employee spends on their job and how much money they spend on it. This means that employees will be rewarded for increasing their productivity and making a profit with what they do in their jobs.
4. Some employees will be paid for performance regardless of output
In this case, the employee will be paid the same amount of money irrespective of the level of the products they produce. This is a way to reward employees who don’t perform well enough or don’t increase their productivity to gain higher wages.
What are the advantages offered by Performance Based Pay?
One of the main advantages of performance-based pay is that it attracts and retains employees who can produce more results than others. It increases the productivity of those who are already working and those who do not work very often and allows them to gain a decent income.
However, Raphael Avraham Sternberg explains that it is only sometimes effective. For example, he mentions that some employees will be motivated by the money they earn rather than the time they spend on their tasks. This kind of motivation can negatively affect teamwork because people may become more focused on how much money they make rather than the amount of input they use or how much their outputs are worth.
To sum it up, performance-based pay is a good idea to attract and motivate employees so long as they know what they’re doing and are not focused on the amount of money they get in return.