Professional organizations link pay with performance. The higher the performance, greater is the pay. Performance related pay include:
1. Piece Rate: - Employees get piece rate based on the output of production. The output may be per hour or per day. Higher the output, higher would the rate pay. This motivates the employees to speed up their production rate.
2. Commission: -Employees, especially in the sales department get commission on the basis of sales turnover. The commission may be at a flat rate or at an incremental rate. Flat rate implies that the rate of commission is in proportion to the units sold. Under incremental rate, the rate of commission increases with the increase in sales turnover.
3. Bonus: - Employees may be paid bonus for producing or selling certain number of units during a certain period. The bonus may increase if the established limit of production or sales is increased.
4. Profit Sharing: -Profit sharing is a system that distributes to employees some portion of the profits of business either immediately or deferred until later profit sharing is based on the mutual interest of both employee and employer. Here the employee becomes interested in the economic success of the company because he stands to gain from it. This fosters team-work.
5. Gain Sharing: -A gain sharing plan establishes a historical base period of organizational performance, measures improvements and shares the gains with employees on the basis of some formula. The company focuses on areas like inventory levels, labour hours per unit of product, usage of materials and supplies and quality of finished goods
Performance related pay generates certain advantages to the organization and to the employees.
1. Job Satisfaction:- Those who performs well, receive higher pay. When employees receive performance related pay, there is greater commitment, which leads to greater effort and therefore, higher is the performance and job satisfaction.
2. Equity in pay: -Performance related pay generates equity in payment. Employees perceive the payment as equitable to their efforts. This may induce under-performers to perk up their efforts in line with high performers.
3. Objective Method: - Performance related pay is objective. It is based on certain criteria such as quality of work, quantity of work, and output per hour and so on. Compared to superior’s subjective performance ratings, the objective approach tends to have higher acceptance by employees.
4. Increase in Employees Commitment: - Performance based pay makes the employees interested in the economic success of the organization. This is because; the Performance or economic successes is directly linked with their pay. Therefore the productivity of the organization improves.
5. Team Work: - Performance related pay is normally provided on the basis of group performance. Therefore, greater teamwork tends to develop in the organization. The high performance may pep (energy) up with the performance of low performers through assistance and guidance.