What is performance-related pay?

What is performance-related pay? Performance-related pay (PRP) is a way of managing pay by linking salary progression to an assessment of individual performance, usually measured against pre-agreed objectives. It’s also known as individual PRP or merit pay.

Is performance-related pay a good idea?

Essentially, performance-related pay can be effective because it gives employees an incentive to work harder to get a bulkier pay packet at the end of the month. The logic behind these schemes is that these mechanisms augment labour market flexibility and generate higher productivity or employment.

Who uses performance-related pay?

Performance-related pay is a financial reward to employees whose work is considered to have reached a required standard, and/or above average. Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved.

What are 4 advantages of performance-related pay?

Benefits of PRP are: It can act as an incentive to increase employee performance and efficiency, through goal-setting, as employees want to achieve the best pay increase. It can improve motivation, focus and morale in the workplace. It can assist to achieve a strong bond between employee and company.

Why performance-related pay is bad?

Fundamentally, performance-related pay is just not a good way to reward employees for hard work. It encourages increased, unhealthy competitiveness and can often lead to burnout, as employees feel pressured to keep working harder and faster until they fall off the hamster wheel.

What are the disadvantages of performance-related pay?


  • Employees can be de-motivated if the goals set are too hard to achieve.
  • Too much of the process relies on the quality of judgement made by a manager.
  • It reduces pay equity and can make a company liable to costly equal pay challenges if not operated fairly.

How many companies use pay for performance?

More than 90% of companies use some type of pay for performance. The most common types are merit pay (annual increases) and bonuses. Both merit and incentive pay improve employee performance. Bonuses have a much greater impact on performance than merit pay.

Why is performance-related pay important?

What are the disadvantages of using a pay for performance plan?

Performance based pay disadvantages include the possibility of contention among employees. Employees who are not earning bonuses can show jealousy toward those who are earning performance bonuses. Jealousy and contention create hostile work environments, which can reduce productivity.

What are the pros and cons of pay for performance?

Pros and Cons of Pay-for-Performance for Nonexecutives
The Good The Not-So-Good
Without PFP, employees may be inclined to shirk responsibility or free ride May weed out high performers who avoid risk

What is the basis of performance related pay?

Performance-based pay ties teaching components such as standardized test scores and teacher evaluations to a salary schedule. Performance-based pay originated from a corporate model that bases a teachers salary on job performance . Higher performing teachers receive more compensation, while lower performing teachers receive less.

What does performance-related pay mean?

Performance-related pay or pay for performance, not to be confused with performance-related pay rise, is a salary or wages paid system based on positioning the individual, or team, on their pay band according to how well they perform. Car salesmen or production line workers, for example, may be paid in this way, or through commission .

What are the benefits of performance related pay?

The Advantages of Pay for Performance Plans Unlimited Compensation. A pay-per-performance plan can sometimes result in situations where the employee may be able to earn a substantial income. Increased Motivation. The opportunity to earn a substantial income can lead to increased motivation. Flexibility. Increased Productivity. Better Retention.

Should performance be linked to pay?

The motivation. Obviously, one of the main motivations for companies to offer pay for performance is to encourage exceptional performance among employees. Since employees are directly related to a company’s success, it’s no surprise that pay for performance came about – the better your employees do, the better the company does.

Share this post