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CHAPTER 1
INTRODUCTION
Many different compensation practices are lumped under the name pay-for-
performance. We used to think of pay as primarily an entitlement. If employees went to
work and did well enough to avoid being fired, you were entitled to the same size check
as everyone else doing the same job as you. Pay-for-performance plans signal a
movement away from entitlement, sometimes a very slow movement toward pay that
varies with some measure of individual or organizational performance.
Despite the omission, merit pay is still pay-for-performance used for more than
three quarters of all employees. Companies uses performance-related pay scheme to
encourage employees to work harder. The better employees or teams, carry out works, the
more the company or employer pays you. It is believed that it is a way of rewarding
employees for higher performance. Employers introduce this type of scheme to keep
current staff and sometimes because of wanting to compete to a new talent, and lastly
they may be seeking a fairer way of distributing wages. In order for performance related
schemes to work they should be based on clear, measurable targets that are agreed by
both the employer and employees.
Performance-related pay is a method of remuneration that links pay progression to
an assessment of individual performance, usually measured against pre-agreed objectives.
Pay increases awarded through performance-related pay as defined here are normally
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consolidated into basic pay although sometimes they involve the payment of non-
consolidated cash lump sums.
It has grown in prominence since the 1980’s as employers have increasingly
sought effective ways of driving high performance levels by linking employee reward to
business objectives. However, it has proved in some circumstances a rather crude
instrument and the 1990s and beyond witnessed a number of challenges to the theory. As
some of the earlier schemes failed to deliver the promised results, some employers
brought in new or revised performance-related pay schemes or moved to new approaches
altogether while others have developed hybrid schemes.
In the current debate on the issue of merit pay for teachers and government
employees, one frequently hears the lament: “If only we could measure results what the
business does. Then we could pay for performance instead of mere seniority!” This
statement assumes that business actually has a rational system of paying according to
performance. The truth is business merely acts and talks as if it does.
Formal merit-pay programs are a relatively recent phenomenon. In the past it was
common for a firm to pay a fixed wage or salary based primarily on market supply-and-
demand factors. Top management made all the major decisions and took the risks. White-
collar employees were few in number and, although better educated than their blue-collar
counterparts, had scarcely any decision-making authority and were readily replaceable.
