Performance-related pay

Performance-related pay (PRP) is a financial reward system for employees where some or all of their monetary compensation is related to how their performance is assessed relative to certain criteria. It is often linked to the theory of performance management, a process which aims to improve organizational, functional, team and individual performances.

Overview

Performance-related pay is designed to link employee performance to the objectives of the organization. It is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved. PRP is usually related to the broader concept of performance appraisal, where an individual's work performance is systematically assessed.

Types of Performance-related pay

There are several types of performance-related pay, including:

• Piecework: This is a system where employees are paid for each item produced or task completed. It is often used in manufacturing industries.
• Commission: This is a form of performance-related pay where employees are paid a percentage of the value of goods or services they sell.
• Bonus: This is a one-off payment given to an employee in addition to their normal salary, usually in recognition of achieving a particular target or for exceptional performance.
• Profit sharing: This is a system where employees receive a share of the profits of the business.

Advantages and Disadvantages

Performance-related pay has several advantages and disadvantages.

Advantages include:

• It can motivate employees to work harder and improve their performance.
• It can help to align the interests of the employees with those of the organization.
• It can help to attract and retain high-performing employees.

Disadvantages include:

• It can lead to unhealthy competition among employees.
• It can lead to a focus on short-term goals at the expense of long-term objectives.
• It can be difficult to measure performance accurately and fairly.

See also

• Merit pay
• Incentive program
• Pay for performance (healthcare)

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