Design Of Perfomance Linked Pay back System Business Essay

Performance-related praise system involves worthwhile employees according with their performance, or results achieved or contribution to organisations performance as individuals or as a part of a group. It will involve a shift of concentration from remuneration models predicated on the price of jobs and staff skills with their performance.

Designing a performance-linked praise system is conditioned by a variety of factors like the character of business, kind of technology, the attitude of unions and individual source of information management strategies of the company. Therefore, no particular model can be suggested; it must be custom-tailored.

Performance-linked prize systems reduce labour cost, bring about increases in real salary and motivate performance. They provide a method of absorbing cost escalation on account of pay increases and therefore help in sustaining competitiveness of the company.

It has been progressively realised that performance-related pay, if used in isolation, may have little effect on motivation for performance. Appropriate conditions in the company have to be designed for performance-linked incentive systems to be motivationally effective. These conditions, for example, will involve proper information, assessment, communication mechanisms, training and development of employees, producing proactive frame of mind and performance-oriented culture, providing non- monetary incentives and changing a competent performance management system and so forth.

Reward system cannot be seen in isolation from compensation management. Reimbursement management is getting increasingly integrated with business and real human learning resource management strategy. Incentive system should, therefore, be considered as an help to better performance in a performance management system which might be integrated with the overall business plan and strategy.


There are various kinds performance-linked reward strategies. Generally, they are designed to-share with or spread to employees as individuals, communities or a collectivity output gains, profit improvement or financial results of business performance. Such plans fall into the following wide categories

Schemes based on specific or small group performance including part rates, traditional merit pay, and sales commission.

Incentive schemes which might connect pay to earnings based on a pre- established formula.

Bonus schemes predicated on contribution to efficiency and profitability regarding to a pre-determined solution with benefits sometimes allocated among the average person employees on the basis of merit ranking.

Productivity Bargaining.

Employee Stock Options Plan (ESOP).

Competency-based pay.

1. Merit Incentive Pay

A common method which has long been around is pay increase or reward payment based on performance score.

The merit motivation pay structure provides another method of recognising and worthwhile differential performance. This method could especially be suited to office personnel. The design essentially involves the following steps

a) The persistence of result-oriented merit score procedures,

b) The recognition of job factors and their relative importance,

c) The formulation of the scale of incentive, and

d) The communication of the foundation of monetary prize.

Illustratively, job factors of salesman can be recognized as (a) sales campaign, (b) realisation of outstandings, and (c) good-will calls, (d) after-sales service and, (e) analysis of issues.

These responsibilities will vary in their degree of importance. This difference can be recognised by imputing numerical principles to different job factors. Hypothetically, let us assign weight worth of 5, 3 and 2 respectively to the aforementioned tasks. In practice, weight beliefs can be ascertained through job analysis.

The real merit rating credit score gives the percentage of basic income or basic wage plus D. A. as motivation extra. Given a result-oriented merit score procedure and its objective operation in an organization, it should not be difficult to install a merit incentive pay system. This is not to minimise the difficulties that are usually came across in operating a -merit ranking system. The effectiveness of the performance appraisal system will rely upon the soundness of the performance appraisal system.

Sometimes merit increments and merit awards are also given in acknowledgement of superior performance on the part of individuals. These are poor substitutes for something of merit incentive pay because of several shortcomings.

Under something of merit increments, there is no prompt romance between reward and work. The quantum of praise at a point of your energy will be considered inadequate. Additional expense by means of enhanced allowances is built for the business on permanent basis. Employees continue to benefit from their best performance even if it remains below standard in the foreseeable future.

Employees getting merit honours cannot visualise a proportionate romantic relationship between their performance and reward. The basis of identifying the quantum can not be told employees who are not given such prizes. This might evoke jealously and friction and could thus jeopardise cooperation and goodwill.

Incentive Payments

Lumpsum repayments such as sales commission is another traditional method. Generally, the performance and the repayment of lumpsum are connected by a formula. Sales fee, however, will not generally consider other parameters of performance such as realisation of outstandings and retailing high profit margin products.

Another traditional approach to worthwhile performance is part rates. There are several weaknesses in this technique. It is not easy to agree with workers on the standard output required. Regular changes may be needed in the typical output anticipated to technology changes which may lead to conflict between unions and management.

Also factors apart from individual performance such as change in work method affect output. Conflicts could also happen between different work categories when one group is dependent on another. There's a potential for turmoil when norms need to be modified because of such factors as technology changes. Also, modernisation of technology and automation has rendered piece rates somewhat obsolete.

2. Incentive Schemes

Output-based incentive design work where duties are repeated and measurable. These involve the following steps

Selecting the objectives

Determining the variables of performance relative to the objectives

Determining the norms or platform values or benchmark values for each parameter

Determining performance-reward relationship

Fixing the relative need for the selected parameters, that is, their weightages

Designing information and treatment formats

Determining the utmost payable motivation amount (incentive opportunity) and, repayment period

Formulating a communication and review scheme

These are, however, not ideal for high technology and service activities, which require information sharing, problem handling and team work. Efficiency gain or revenue sharing or employee stock options plan (ESOP) may be suited types for such activities.

3. Group Motivation and Output Gain Sharing

Under the production gain sharing techniques, productivity gains are shared in accordance to an arranged pre-determined formula. Earnings sharing gives a share of income. Sometimes, the quantum of extra is determined on the basis of income as well as output improvements matching to a pre-determined benchmark value for every single of these.

4. Production Bargaining

Productivity bargaining provides yet another approach to improving output and linking wage boosts- to such advancements. Productivity bargaining, however, does not mean an incentive scheme or wage increases in return for assurances and guarantees from unions for achieving production targets. This technique implies (a) a detailed research of the businesses procedures, (b) the recognition of cost reduction alternatives, (c) estimation of savings in expense, and (d) the introduction of a system o indexing wage boosts with cost reductions actually realised over time. The weather for efficiency bargaining has never been more favourable than now. It is for managements to use initiative and build this process in their collective bargaining marriage with Unions.

5. Long-Term Incentive (ESOP)

Long-term incentive by means of employee stock options schemes are handled both to improve long-term incentive and to reduce set cost. ESOP envisages worker participation in and possession of any company's equity.

This plan is supposed to offer an motivation to the employees to enhance the all- rounded performance and expansion of the business and talk about its prosperity. The program usually involves allotment of collateral shares regarding to a laid down treatment and subject to governmental regulations, laws and regulations and guidelines. The employees advantage by means of improved market value of his shares and capital gains, which be based upon company's and worker performance. Several software and high-tech organisations such as Infosys have conceived and designed such programs.

6. Competency-based Pay

The competency is a critical determinant of performance. Therefore, there is an increasing fascination with offering monetary motivation for acquiring competencies necessary for higher performance on the present job or for the next job. Such competency may for occasion include values, attitude and behavioural characteristics which affect performance.

In developing a performance associated reward scheme, selection of an appropriate plan should be considered as critical. The decision will be determined by a number of factors such as the mother nature of the company, the type of technology, the nature of profits, the nature of market segments, the human learning resource strategy and business goals.


There is a number of kinds of performance-linked techniques. These must be strongly adapted to the particular conditions of specific businesses and the concerned sets of companies. In building a custom-tailored performance-linked compensation scheme, the next steps are important

1. Custom-Tailored

There is little range for relying on model or standardized schemes. Makes an attempt to impose specific performance-linked pay back systems through central laws generally appear to fail. Frequently the appropriateness of what is being required can happen doubtful from the point of view of individual enterprises. Therefore, care and attention must be studied in adapting such techniques to the particularities of specific enterprises.

2. Objectives

The objectives of the techniques need to be carefully produced. Such aims are needed to guide the selection of performance measures, the standards of bonus computation formulae and the getting of common understanding on how big is bonuses which may be expected through the schemes. The potential for performance improvement may vary greatly in one enterprise to some other, as well as with the duration of time. Both the brief and long haul goals for the scheme should be discovered.

3. Collection of Performance Measures

The collection of performance measures must be regular with the plan aims; these must encourage those types of behavior considered important for organizational performance such as increasing result, lowering labour and other costs, enhancing quality or timeliness of delivery, stimulating co-operation amongst work groups, enhancing adaptability and inventions, etc. Furthermore, they must not be pursued at the expense of other performance parameters. At exactly the same time, the measures of performance selected should, to a large amount, be under staff control, rather than influenced by external influences. Employees will be demotivated if their finest work are offset by factors they cannot control. The machine, the performance which is measured, should be small enough to ensure that employees can easily see some relation between their attempts and rewards. To make sure motivational effectiveness, the actions of performance also needs to be easily known by the staff concerned, subject to ready verification if suspicions happen, and be calculable at frequent intervals.

4. Basis

Depending on circumstances, performance honors may be identified based on improvements over the previous year, improvements over the basic period performance, or the maintenance of a higher degree of performance. Bonus deals which become remarkably large should be integrated into basic wages in order to avoid distortions in pay set ups. Where necessary, it may be advisable to holiday resort to procedures for stabilising add-ons of lengthening the period over which performance is computed.

5. External Influences

To the level possible, the original agreement building the scheme should designate how goal performance levels should be handled when their accomplishment is damaged by external influences such as changes in. development methods, product mix and prices of inputs and outputs.

6. Distribution

The guideline for the circulation of bonuses between workers should be simple and greatly supported. It might be based on wage rates or average earnings. Also, to discourage unnecessary absenteeism, bonus is sometimes varied with the amount of hours or days and nights performed. However, distributions in accordance with assessments of individual employee performance by supervisors may be difficult, especially if such assessments lead to significant variance in pay.

7. Equity

There should be identical opportunities to earn bonus items, even though the performance measures may vary. Furthermore, performance focuses on should be arranged after having a careful scrutiny of the historical behaviour of the methods decided on. The quantum of bonus should be significant enough to evoke extra efforts. At exactly the same time performance awards shouldn't be so large concerning jeopardized a significant part of staff profits for reasons beyond their control.

8. Safeguards

Such schemes shouldn't be substituted for wage increases that otherwise could have been awarded or replace set wages with adjustable income. Performance pay should complement rather than replace existing wage bargaining plans and really should not question the necessity to maintain basic pay at satisfactory levels. Perhaps of even greater importance in a few contexts may be the need to give assurances to existing employees that efficiency improvements would not place jobs in jeopardy.

9. Engagement and Communication

Such plans must be perceived as behaving in the interest of employees as well as employers. Appropriately such techniques must be implemented in ways that influence employees that they can receive a fair share of the huge benefits derived from their extra attempts and their jobs will never be threatened. Schemes predicated on collective performance work better when the scheme objectives and procedure are explained in detail to all the employees worried. The success of schemes depends to a huge extent on the amount of effort given by management to discussion at various periods - in the planning and design of the structure, along the way of implementation and monitoring of results. Furthermore, the techniques have an improved chance of success if employees are given with full opportunities to provide their ideas for causing improvement. Performance- connected strategies function most effectively when they are accompanied by a formal participative system that facilitates: (a) the transformation of agreed functional suggestions into real changes in operating methods and methods; (b) two-way communications at all levels on operating troubles and standard business movements.

10. Union Contribution in the Design

Performance reward plans may work most effectively when staff member representatives receive full chance to take part in their design and administration. Such engagement may facilitate understanding and acceptance of scheme goals. Moreover, staff may only completely trust the plan if it's been elaborated in assessment and contract with worker representatives and they're subsequently given opportunities to check that awards is being calculated fairly.

Also, the commonality of interests of staff and employers in upgraded productivity, performance, earnings and equity is likely to be much more obvious where pay systems are developed and elaborated relative to rules set up through collective bargaining.

11. Review

There should be a clear provision for adjustments owing to changes in development methods or in prices or inputs or outputs.

The effectiveness of all pay systems decays as time passes and the length of time of schemes predicated on collective measures of performance are particularly short. Accordingly it should be foreseen that the basic guidelines of such strategies would experience regular regular revisions. Indeed it ought to be expected from the outset that the collective performance measures and focuses on would undergo continuing change every couple of years in the light of the experience.


There are extensive issues and movements appear in linking performance with prize system that are the following:-

1. Degree of Education

The level of education of the employees, among other factors, will determine what type of design is likely to be easily known by them and will motivate them. The nature of the business enterprise and the businesses will also affect. Organisations in low cost processing or which promote advancement, skills and higher performance or that are in service business might need to consider different forms of performance pay. Their business and individuals source management strategy will change; the form and content as well as targets of performance pay should be steady with them.

2. Trade Union

The potential for success of performance-linked pay will rely upon the custom of collective bargaining and attitudes of unions. As the negative attitudes hinder its release, the positive attitude considerably facilitates it

3. Organisational Culture

Performance pay gives better results in organisations characterised by staff participation and team heart. A pro-active culture in the organisation is available to be valuable to performance and output.

4. Offer of Monetary and Non-Monetary Incentives

Performance pay reaches best an element in the reward management and motivational system. Besides performance pay, it is vital to give consideration all together to such aspects as re-organisation of work process, training, staff involvement and participative decision-making, opportunities to add ideas and knowledge, non- economic recognition, career development and goal setting techniques.

5. Satisfying Good Performance

Rewarding good performance can include, amongst others, such mechanisms as cash awards, appreciation letter and certificates, trained in reputed institutions, foreign travel, job enhancement and enriched functions, publicity in notifications and regular membership of professional societies, etc. For higher performance of performance-linked gives system, such pay back mechanisms should also be utilized.

6. Performance Pay and Performance Management

It is progressively more realised that performance is afflicted by a variety of factors. These factors, for example, will include knowledge and skills which can be developed through training, work attitudes and intrinsic rewards. These and other factors which have an impact on performance are considered in the wider framework of performance management and individuals tool management with performance pay constituting an component of it.

7. Caveats

It is being progressively more realised that

The performance pay systems should be designed to promote the type of performance an organisation needs. It should, therefore, be included with human source of information management strategy for better performance and development of the organisation.

The performance pay should underpin the organisation's main principles such as team work, ingenuity, versatility and quality.

The system should offer an impetus to and support the behavior expected of the employees. Therefore, it must talk to employees the type of behavior to be rewarded and the way in which it'll be rewarded.

The incentive system should be strengthened through re-organisation of work process and enlarged job duties, training, consultation, communication and participatory system. Employees also needs to be consulted in the formulation of the program.

The conditions for determining performance should be objective, measurable, easily known and related from what employees can control.

The quantum of performance pay should be significant enough to be motivationally effective and its circulation should be equitable.

The payment of performance pay should follow the performance as soon as possible and as much as is possible.

The performance level should be possible; otherwise it has a demoralising effect.

The quantum of pay should be sufficiently adaptable to soak up downturn and properly pay back when performance is good; it should also guard the minimum amount remuneration for the value of the work.


Q1. Explain what's performance-linked praise system?

Q2. What exactly are the various ways in which performance can be linked to pay back system?

Q3. In developing a performance-linked praise system, what factors will you take into account?

Q4. List out the various steps involved in creating a performance-linked prize system. Give a good example.

Q5. Examine the existing issues and trends in linking performance with compensation system.

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