PERFORMANCE BASED COMPENSATION "" HOW IT CAN BE USED STRATEGICALLY IN TODAY'S COMPETITIVE WORKFORCE 1) Definition of Performance Based Compensation Performance based compensation can be defined as programs implemented for recognizing employees' contributions. Different programs differ according to four different features, namely, the payment methods, the frequency of payout, ways of measuring performance and choice of which employees are covered. Performance based compensation is extremely important as it can affect the workforce composition of a company as well as employee productivity and output in a company.
1.1) Effects of Performance Based Compensation on Workforce Composition According to Sarah L Fogleman in " Creative Compensation"Ã¯Â¿Â½, compensation packages can be linked to recruitment and retention. This is true to a large extent as different pay systems will attract different people with different traits. Organizations that link pay to individual performance through use of methods such as merit pay and individual incentives will tend to attract more individualistic employees.
Vice versa, organizations relying on team rewards such as gain-sharing will attract team oriented employees.
This is view is also supported by the Cornell University's paper 99-06 where it is suggested that pay not only affects which applicants apply, but also which applicants accept offers and stay in the workforce. Its findings show that a contingent (pay for performance) system was more attractive to risk takers. It is thus important for organizations to clearly determine what kind of employees they intend to attract and tailor the right kind of incentives to motivate and retain these people.
1.2) How Performance Based Compensation affect Employee Performance.
According to the Cornell University's research paper 99-06, there is an inference to be drawn between the type of performance based compensation and employee performance. A study was conducted where three pay strategies were formulated.
This experiment was conducted...