Performance related pay can improve performance. Image credit loophaiti.com

Performance related pay can improve performance. Image credit loophaiti.com

ZIMSEC O Level Business Studies Notes: Performance Related Pay

  • A financial reward system for employees where some or all
  • of their monetary compensation is related to how their performance
  • This performance is based according to a stated criteria
  • For example workers are paid a bonus when they achieve a certain level of production or when the quality of products meet/exceeds a certain quality level
  • It is also known as performance linked pay
  • Examples of performance related pay include the payment of commissions and bonuses
  • The piece rate system also falls under performance related pay

Advantages

  • It provides a direct incentive for employees to achieve the defined business objectives/targets
  • Rewards employees who work towards set goals
  • Results in the development of a compliance culture within the organisation
  • Encourages employees to come up with efficient ways to achieve the organization’s goals
  • Helps to improve worker vigilance and reduces supervision costs
  • Can be used as a motivational tool
  • Helps the organisation to retain the most skilled and best staff
  • It’s an effective way of dealing with poor performance
  • Helps with communicating the goals to the entire organisation

Disadvantages

  • It reduces equity in terms of pay as different individuals will earn different compensation for the same job/tasks
  • Can hinder cooperation and teamwork as individuals focus on their own performance instead of the team’s performance
  • Only rewards employee for certain aspects of performance e.g. the piece rate system focuses on quantity which may come at the expense of quality
  • Employees can be demotivated if the set goals are too high
  • Employees and employers will focus on financial gains instead of their own their development
  • Not all jobs or tasks can be reduced to simple performance standards
  • Performance Appraisal is a judgement based assessment method it is difficult to objectively measure performance
  • Recognises performance and not effort
  • Can lead to clashes with Trade Unions
  • Can be costly to implement
  • It can be difficult to translate performance into pay
  • Makes costing difficult
  • Makes financial planning difficult
  • It is difficult to understand how payment is calculated

To access more topics go to the O Level Business Notes page.

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