What is Pay-for-Performance Compensation

By hrlineup | 21.12.2021

Pay-for-performance systems are popular nowadays in most organizations. The plan acts as part of employees’ compensation for their hard work in achieving their objectives. You will want to consider this pay-for-performance compensation program. It comes in different forms depending on your organization’s goals, compensation knowledge, and budget.

When you start to consider this compensation plan, you will want to look into the goals that you have set for the organization. Putting the goals into consideration will help you effectively budget the amount you will use to compensate the employees. You will also have a frequency of compensation. So how does pay for performance work? It can either work in favor of the organization or against it. So, let’s look into it.

Benefits of Pay-for-Performance Compensation

Boosts motivationA compensation plan should be able to influence employees to make decisions that are in favor of the organization’s needs. Employees will feel motivated to be part of the organization. They will also perform their best in achieving the organization’s goals hence low turnover.

Increased productivityAlthough there is no proof, paying more will guarantee employees with high experience. Having highly skilled employees will make them feel cared for and increase productivity. As production increases, you will be able to stay on top of the competition.

CosteffectiveWhen you pay employees more, they work harder, and production rises. This type of compensation, therefore, benefits the organization directly. The organization will also know who the most hardworking employees are and decide who to give incentives.

The Argument against Pay-for-Performance Compensation

Pay-for-performance management can be hazardous at times. Most of your employees will take advantage of this plan and not deliver what you had visualized. You won’t continue paying them for underperforming, will you? You will only fire them, which will cost you more when hiring another employee to fill the position.

It will also cost an organization more money if the employees do not perform at higher levels. The organization will have to train them and buy the resources, which can be costly and cumbersome.

Another argument against this type of compensation plan is that it will be difficult for an organization to change the terms or end the program. Once you change the program, the employees will start to underperform because they are used to the benefits.

This type of compensation plan has increased income gaps between the rich and the poor. Only hardworking employees earn more. It may also discourage teamwork as the more paid employees will feel superior to the others.


Even though the performance-based compensation may influence employees, it is up to an organization to decide if this plan favors it. There are many plans that employers can use to motivate their employees. They need to come up with clear guidelines on bonuses and wage increases. They should also focus on the goals and consistency of a plan before implementing it.