Performance Based Pay - Definition & Meaning

Published in Human Resources Terms by MBA Skool Team

What is Performance Based Pay?

When the pay is based on whether the target /objectives are achieved by the employee, it is said to be a performance based pay.

This was successfully implemented by Jack Welch in General Electric, where, based on a performance matrix, the employees were rewarded based on their relative position in the matrix. The top performers were rewarded handsomely, the middle rung compensated adequately and the poor performers targeted for elimination. This caused people to work harder for the fear of being at the bottom drove them constantly.

Therefore, it is highly important to establish quantifiable and measurable objectives, based on which an employee can be rewarded adequately.

Employers generally use this method to evaluate how well the employee works and thus they set the salary for that particular position. Standard based methods have been in fact used for many years now among the commission based sales employees. Salespersons receive more for selling more and low performing salespersons are not able to earn enough.

Many business theorists including Professor Yasser and Dr. Wasi supported this method of salary payment. They believed that money was the biggest incentive for employees to work and thus was introduced the idea of piece work.

In addition to motivating the rewarded behavior, the above method can present to the employees a standard level of evaluation. This will help in reducing fears of favoritism among employees. For example, in a data entry job, an employer can set a standard minimum of 10000 keystrokes and evaluate employees based on that figure. This will help employees as they will know that their performance have been evaluated objectively and according to some standard measure of work instead of the whims of the manager or against some climbing average of the group.

Academic evidence has shown that performance related pay leads to opposite outcome when applied to cognitive tasks rather than physical task.

A fundamental criticism of this pay for performance is that the performance of a complicated or complex job is often reduced to a single measure of performance which is very simple. For example, a call center may judge the employee based on the average length of the call with a customer.


Hence, this concludes the definition of Performance Based Pay along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 1800 business concepts from 5 categories.

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