Managing Employee Performance and Reward Concepts, Practices, Strategies

In this chapter we identify the main categories and types of performance-related reward, and consider some of the general motives for adopting performance-related rewards. We review how performance pay can help with the attraction, retention and motivation of employees and the types of employees most likely to prefer to be paid based on a measure of performance. We ask if performance-related pay is fair for employees and identify the obstacles to performance-related pay effectiveness in organisations. We conclude the chapter by reviewing alternative perspectives on the role of performance-related pay in organisations.

What is performance-related pay?

Performance-related pay can be defined as any remuneration practice in which part or all of the remuneration is based directly and explicitly on employees’ assessed work behaviour and/or measured results. Performance payments are in addition to base pay, although they may be rolled into base pay or have to be re-earned each time period (Milkovich & Wigdor 1991).

For organisations, the employment relationship is open ended: while the wage can be agreed in advance the amount of employee effort cannot be specifi ed explicitly (Edwards 1995 ). Performance-related pay seeks to introduce greater clarity into the employment relationship by specifying the terms of the employment transaction.