Pay for Performance

Frederick TaylorOpens in new window popularized financial incentives—financial rewards paid to workers whose production exceeds some predetermined standard—in the late 1800s. Today’s employers use many incentives to motivate employees. All incentive plans are pay-for-performance plans because they tie workers’ pay to performance.

Pay for performance is probably the first thing that comes to mind when most people think about motivating employees.

Pay for performance refers to any compensation method that ties pay to the quantity or quality of work the person produces.

Piecework is the oldest and most popular individual incentive plan. Piecework pay plans are probably the most familiar: Earnings are tied directly to the number of items the worker produces in the form of a “piece rate” for each unit he or she turns out.

For example, an employee who gets 40 cents apiece for stamping out circuit boards would make $40 for stamping out 100 a day and $80 for stamping out 200. Sales commissions are another familiar example.

Piecework plans have a firm foundation in motivation theoryOpens in new window. Behavior modification theories state that people will continue behavior that is rewarded, and pay for performance plans, of course, tie rewards directly to behavior.

Pay for performance plans of all types—including those that let employees share in profits by paying them with shares of company stock—are becoming more popular because they make sense. Pay-for-performance programs can be designed to reward individuals or groups. In terms of time orientation, they can be attached to short- and long-term goals.

In the United States, employees generally prefer individual pay-for-performance programs over group pay-for-performance programs. Pay-for-performance programs aimed at rewarding individuals can be broadly organized and categorized using the categories of merit pay and variable pay.

Companies like IKEAOpens in new window and PepsiCoOpens in new window are successful examples of companies that use pay for performance. For example, at IKEA, employee motivation is considered important when an organization is building relationships for better communication with their employees.

IKEA once conducted a special bonus for its employees by pledging the entire day’s sales revenue for its employees. That day the sales doubled and all the employees received $2,400 each.