BUILDING PERFORMANCE BASED PAY CULTURE FOR BETTER BUSINESS RESULTS

Performance measurement and rewarding the employees on the basis of the outcome of the
performance is a critical dimension in the study of compensation management. One of the latest
strategies being followed in all sectors throughout the world for retention and talent management is
"linking compensation to performance". Commonly known as "Performance pay" or "Performance
based pay", it links the compensation of the employees to their performance and their contribution to
the organizational goals.
Therefore, periodic performance reviews play a vital role and provide the basis of performance
related pay. Pay-for-performance is essentially trying to move away from the seniority-based
compensation system that has prevailed in the corporate world. Commissions, incentives and
bonuses, piece rate pay help the employer to pay the employee according to their productivity and
hard work. Its main payment logic is variable pay.
The variable component is linked, through a formula, to the performance of the company, of the
group or team with which the individual works, and of the individual.No firm has a choice as to
whether or not, it should appraise its personal and their performance, but the choice lies between the
systematic approval and the unsystematic or casual appraisal. But in organizations, formal
programmes of evaluating employee should be conducted in a systematic and planned manner
which have achieved wide spread popularity in recent years.
The individual employee may also like to know his capability in terms of his performance on the job
qualitatively and quantitatively in comparison to his fellow employees so that he may improve upon it.
Thus, teachers evaluate the performance of students, bankers evaluate the behavior of their
children, and all of us, consciously or unconsciously evaluate our own actions from time to time.
Therefore, it is necessary for the management to know these differences, so that it may develop
certain programmes in the organization for those employees who have better potentials by rewarding
additional payments to them. Appraising the performance of the individuals, groups and
organizations is a common practice of all societies.
PERFORMANCE APPRAISAL
It is well established that people differ in their abilities and aptitudes. In social interactions,
performance evaluation is done in a haphazard and often unsystematic way. While in some
instances, these appraisal processes are structured and formally sanctioned, in other instances they
are an informal and integral part of daily activities. Performance refers to the degree of
accomplishment of the tasks that make up an individuals job.
Ability to plan, delegate, control and co-ordinate

 Knowledge of the job Clarity about his objectives

Cost consciousness and result/profit orientation
Power of expression, written and oral
Decision making and reasoning
Comprehension
Use of discretion and judgment
Resourcefulness and industry Performance appraisal has a number of specific objectives.
These are given below:
To review past performance
To assess training needs
To help develop individuals
To audit the skills within an organizations
To set targets for future performance
To identify potential for promotion Assessment should not be condensed to past performance
alone. In order to find out , whether an employee is worthy of continued employment or not, and
if so, whether he should receive a bonus, a pay raise or a promotion, his performance needs to
be evaluated from time to time.
In some cases, the wage increases to some employees on the basis of their performance may be
justified by the Performance appraisal results. Performance appraisal is a systematic evaluation of
the individual with respect to his performance on the job and his potentials for development.
Performance appraisal is the systematic description of an employees job relevant strengths and
weaknesses. Potentials of the employee for future performance must also be assessed.The following
are some of the factors that can be considered, while assessing the performance. Appraisal and
seniority are combined in some cases for higher salaries and better positions. It is the continuous
process; Appraisals are arranged periodically according to a definite plan.
COMPENSATION
In a laymans language the word Compensation means something, such as money, given or
received as payment or reparation, as for a service or loss.

Money is included under direct compensation (popularly known as basic salary or wage, i.e. gross
pay) where the individual is entitled to for his job, overtime-work and holiday premium, bonuses
based on performance, profit sharing and opportunities to purchase stock options.
It does not include: Wage and salary payments and merit pay Over-time payments, pay for holiday
work or differential according to shift, i.e. all payments which could be considered incentives to
perform work at undesirable times Premium pay for performing danger tasks.
While benefits come under indirect compensation, and may consist of life, accident, and health
insurance, the employers contribution to retirement (pensions), pay for vacation or illness, and
employers required payments for employee welfare as social security.
The word Compensation may be defined as money received in the performance of work, plus the
many kinds of benefits and services that organizations provide their employees.
While French says, the term Incentive system has a limited meaning that excludes many kinds of
inducements offered to people to perform work, or to work up to or beyond acceptable standards.
On the other hand, the word Reward or Incentive means anything that attracts an employees
attention and stimulates him to work.
Compensation represents by far the most important and contentious element in the employment
relationship, and is of equal interest to the employer, employee and government.
An incentive programme is most frequently built on monetary rewards (incentive pay or monetary
bonus), but may also include a variety of non-monetary rewards or prizes.
Compensation or rewards (incentives) can be classified into Direct compensation and Indirect
compensation. An incentive scheme is a plan or a programme to motivate individual or group
performance
PURPOSE FOR ESTABLISHMENT OF A SOUND COMPENSATION AND REWARD
ADMINISTRATION The basic purpose of establishment of a sound compensation and reward
administration is to establish and maintain an equitable compensation structure
Framework of a Compensation Policy Employee motivation and performance management
depend on good systems that offer both financial and non- financial rewards (non-monetary
rewards).
A good rewards and remuneration system ensures that each person receives appropriate
financial and non-financial recognition to account for the personal contribution they are making
and the overall value of their position to the organization.

Good salary administration requires that employees should receive financial recognition for the
contribution that they make, and that positions of equal value should be entitled to equal
compensation.
A sound wage and salary administration tries to achieve the following objectives: (i) For
employees Employees are paid according to requirements of their jobs, i.e., highly skilled jobs
are paid more compensation than low skilled jobs.
The best performance appraisal system in the world will not work if it is linked to a rewards and
remuneration system that employees do not trust or support.
Remuneration is a component of both financial and non- financial reward; financially, in terms of
cash and benefits received; non-financially in terms of recognition, status and esteem, e.g. the
status of full private use of a motor vehicle.
The variable component is linked, through a formula, to the performance of the company, of the
group or team with which the individual works, and of the individual.
As the compensation is linked to the performance of the company, it is very important that there
is a clear understanding of which performance parameters will be considered for the purpose of
evaluation.
Employees' morale and motivation are increased because a wage programme can be
explained and is based upon facts.
The Pay-for-Performance Model Compensation systems have started reflecting higher levels of
discrimination, and large variation in pay packages are now accepted by managers in many
corporations and professions
Setting the target bonus for different levels of performances
Measuring the performance of the employee
Giving rewards and bonus according to performance Determinants of effective pay for
performance systems
: Worker value outcomes (Money and Prices)
Outcome is valued relatively to other rewards.
Worker must believe that increased output will result in receiving a reward.
Performance measures must be compatible with strategic goals for short and long terms.

 Worker must be able to control rate a output.

Worker must be capable of increasing output.
Worker must believe that capability to increase exists.
Summary:

The result of a true pay-for-performance culture is a more energized and engaged

workforce that clearly understands how their contributions affect overall company
success, and know they are being compensated fairly for their efforts.
The goals of compensation administration are to design the lowest cost-pay structure
that will attract, motivate, and retain competent employees.
The overall business results can be enormous: retention of top talent, higher levels of
performance throughout the company, and greater revenue and profits.
Compensation is usually composed of the basic wage or salary, allowances, incentive or
bonuses, and benefits.
The fact, how employees are paid, has important consequences for individual, group and
organizational performance.
It consists of organizations policies, procedures, and rules determining the
compensation system