Pay-for-Performance Plans as Employee Compensation

Pay-for-performance (P4P) plans refer to a philosophy of companies rewarding their workers for valuable contributions that they make. In order for such plans to be truly successful, companies should adjust them to the specific performance objectives that the workforce has to fulfill as well as the financial outcome that is expected to be achieved at the end. In its essence, the pay-for-performance framework seeks to answer questions such as “how can employees be motivated to encourage them to reach organizational goals?” Building an effective and sustainable P4P model entails taking into account both qualitative and quantitative performance for linking it to rewards. The most common practices that companies use in regard to P4P include the identification of triggers for top performers and the formulation of clear-cut objectives that workers must reach to get rewards. It is important to mention that P4P plans range depending on how companies operate and what goals they plan to achieve. Therefore, plans can include such models as special recognition, base compensation, opportunity income, individual incentives, lump-sum bonuses, and more.

In this paper, pay-for-performance plans will be explored concerning three points: how can companies measure the effectiveness of such plans, what are the disadvantages of plans from employees’ perspectives, and what limitations do these plans present from the perspective of employers. Also, the essay will explore how P4P should be integrated into the modern business sphere to ensure that they remain effective and sustainable, with a specific focus on relationships between employees and their managers.

Measuring Pay-for-Performance Effectiveness

Given the focus of modern organizations on measuring their cost-effectiveness, analytics, and key performance indicator tracking, there has been limited progress in the way businesses assess the effectiveness of reward practices such as pay-for-performance. Since human resource (HR) managers are already burdened by an array of metrics to measure, there is a lack of time and resources to dedicate to assessing whether pay-for-performance measures are effective. Despite such challenges, there are still some methods that companies can use. Because the key purpose of P4P systems is to enhance the strategic success of the business through reaching corporate goals, it is essential for companies to make sure that the introduced programs follow the criteria below:

  • Having a broad impact on performance;
  • Focusing on future needs of businesses;
  • Having a direct influence on both short- and long-term goals;
  • Having potential for strengthening competitive advantage.

The first step in measuring pay-for-performance programs’ effectiveness implies the setting of strategic goals and criteria for success. For instance, a company can choose to identify a clear set of reward goals that may include the enforcement of clarity and transparency, the focus on external markets, flexibility and personal choices, performance-related pay, and so on. According to the research conducted by Brown and Reilly (2009), the following criteria are used for measuring the effectiveness of reward arrangements:

  • Levels of employees’ motivation and commitment;
  • Programs are within the budget;
  • Employees change in response to companies’ needs;
  • Programs are controlled and easier for managers to administer;
  • Programs are externally competitive;
  • Programs are customized to employees’ needs (Todericiu & Serban, 2013).

The next step that follows the stage of criteria identification implies the review of rewards. Such reviews can range depending on the needs and capabilities of each business and therefore can include regular assessments that monitor rewards’ short-term impact or in-depth evaluations that are conducted annually. Effectiveness reviews include collecting information from practices that exist within organizations, identifying principal issues to manage, and considering potential problem improvement strategies.

Measurements of P4P effectiveness can vary depending on how companies usually approach the process of performance evaluations. For instance, some companies prefer conducting annual plan reviews and compare the performance of their workers at the end of each year to see whether the introduced incentives work. Such evaluations can show HR managers which of the plans worked well, what processes should be improved, and what practices should be eradicated. Another method that companies may use refers to performance and payout distribution to assess how the incentive plan paid out compared to KPIs in different aspects and levels of an organization. If there is a disconnect between the overall performance of a company and the number of rewards paid to employees, the P4P should be considered ineffective.

Disadvantages of Pay-for-Performance Plans: Employees’ Perspective

While workers are expected to be extremely motivated by additional incentives that reward them for excellent performance, there are still some disadvantages of using P4P strategies that businesses should take into account. As mentioned by Eneh and Awara (2016) “HR should be seen and valued as an asset that contributes significantly to the growth of the organization,” which means that all efforts that HR managers implement should lead directly to better performance (p. 34).

Unfortunately, for employees, there is a risk of de-motivation associated with P4P plans because many of them set unrealistic of too-hard-to-achieve goals. As a result, when workers cannot reach the desired level of performance, they get discouraged and therefore decrease performance altogether. Also, some P4P plans work only for short-term goals that are easy to quantify, which means that they are narrow in focus and are only attainable to a limited number of employees. Setting performance standards that not all workers can reach and rewarding only those who have more experience is an unfair practice that can lead to potential HR hurdles.

Another disadvantage of introducing P4P programs within organizations is associated with the hindrance of team spirit and cooperation. When workers expect to get higher pay for better performance and achievement of set objectives, they can often compete with their co-workers and sacrifice teamwork for rewards. While some competitiveness is essential in the workplace to ensure progress and coming up with new ideas on a short-term basis, sustaining a P4P plan for a long period of time is likely to adversely affect the spirit of collaboration. Contention among employees can also arise when pay-for-performance policies show some level of favoritism of managers toward certain employees, which makes others feel jealous toward those who are earning more through rewards. Contention and jealousy in the workplace cause further challenges within corporate environments and can also reduce productivity, which is the last thing that P4P policies would like to do.

With regards to the financial aspect, there is a danger that workers would expect to receive additional payouts. In climates characterized by low inflation, the reward that workers receive for better performance may not appear large enough, which can subsequently lead to the decrease of interest in P4P plans. The decrease in interest usually means less employee input because of the fear that any suggestions or recommendations will not be well received. According to Johnson (2011), “employees hold back their input even if their ideas are good because they are concerned about a reduction in earnings” (para. 8). Since many businesses rely on their workers’ input when making valuable decisions, the fear of losing their rewards will prevent companies from having innovative ideas.

Lastly, pay-for-performance plans should be assessed with regards to how workers’ quality of personal and professional life can be affected. When P4P plans are reviewed in the context of HR work, it is important to understand that the established policies do not disrupt the quality of work life because many employees may focus on only achieving better performance while forgetting about the balance between personal and work life (Yadav & Singh, 2014). Because of this, financial plans need to be supported additional non-monetary rewards such as alternative work schedules, health club activities, yoga classes, and other facilities that help maintain the quality of workers’ lives on high levels.

Disadvantages of Pay-for-Performance Plans: Employers’ Perspective

Pay-for-performance policies vary depending on the specifics of industries, operational capabilities of companies, the number of employees, or resources available to workers. From the perspective of employers, P4P systems are usually inconsistent because performance appraisals need to be conducted fairly and in the exact manner that has been previously approved by the HR department or a company’s executive team. Appraisals usually lead to the subjective interpretation of employees’ performance, which limits the effectiveness of P4P systems. The second point that presents a disadvantage to employers when it comes to ensuring the establishment of P4P systems is the lack of unified frameworks and guidelines on how performance ratings should be developed. Such systems range from incentive plans to wage increases, which means that there is no unified approach to how the issue is treated. Importantly, when employers do not effectively communicate to workers what are the standards and guidelines of P4P plans that they have created, the likelihood of them failing is high.

For employers, there is a tremendous challenge of addressing the burden of decision-making that lies on managers. Being objective during performance reviews is a complex task because of a variety of factors that come into play. Moreover, with the changes in rewards that employers pay to workers may come the reduced pay equity, which subsequently leads to decreased employee satisfaction. If not operated in a fair manner, pay-for-performance plans can lead to companies being liable to equal pay challenges, which are disruptive to the overall business process. Despite the fact that the purpose of P4P and other reward plans is boosting performance and making sure that employees reach goals that their management has established, employers risk demanding from workers too much.

Application of Pay for Performance to the Business World

Overall, pay-for-performance plans can hinder relationships between employers and employees. It is advised to conduct implicit negotiations between what managers wanted and expected from their subordinates as well as what employees wanted and expected to receive from P4P plans. It has been challenging for both parties to reach consensus because employers value performance while employees value rewards, which means that the goals are not the same. In addition, there has been an idea that challenges arise because P4P incentives work too well. In particular, reward plans encourage workers to pay excessive attention to what they should do to for getting paid, which means that they often forget about doing things that are helpful for the organization. Thus, the application of pay-for-performance policies to facilitate the achievement of corporate goals is impossible without preliminary negotiations between employers and their subordinates.

Designing an effective pay-for-performance plan in the workplace should start from the evaluation of performance because standards and measures that show how well a business is doing matters both to managers and employees. Evaluations of performance are usually conducted by the most suitable supervisors that know how to recognize and quantify every aspect of employees’ work while avoiding subjectivity. Through communication and transparency, a company will be able to establish a clear and effective P4P plan that will encourage workers to improve their performance. In the business world, applying strategies that incentivize workers to perform better is impossible without making sure that organizational goals are defined and that workers understand how they should achieve those goals. Training is an essential component for guaranteeing the success of P4P programs because it will inform employees on how such plans will operate, what behavioral models and professional accomplishments will be rewarded, how employees will receive feedback, how fares will be enforced, and so on.


The exploration of pay-for-performance programs showed that rewarding employees for their accomplishments is a beneficial strategy that businesses can implement for boosting productivity and sustaining a competitive advantage. Despite the fact that P4P plans make workers focus on achieving goals and bringing value to organizations for which they work, there is a variety of challenges that both employers and employees face when dealing with such plans. Among the most adverse effects of P4P plans when it comes to the employees’ perspective is the increased competition and jealousy among workers. When workers see that some of their fellow employees get greater awards for their work, jealousy can appear and lead to confrontations in the workplace. In regard to employers’ perspective, P4P incentives present a challenge because of the lack of unification in how the rewards are defined, measured, and distributed. Managers may often find themselves in a position of having to make too many crucial decisions on rewards, the results of which may not always be well-perceived by employees.

The measurement of P4P effectiveness boils down to the clear identification of goals that companies want to achieve and the assessment of valuable performance indicators that workers show. For ensuring that the measurements are done correctly, it is advised for businesses to adjust plans to employees’ capabilities, make sure that goals are attainable, and verify whether rewards are within the budget. It is important to mention that measuring P4P’s success is complex because of the variety of variables that come into play. Moreover, it is the HR manager that is usually burdened by the measurement of performance indicators to develop reward ratings, which subsequently increases their overall workload. In order to effectively introduce P4P plans in the modern business environment and make them ‘the norm,’ it is recommended for managers and their subordinates to negotiate the most plausible conditions under which plans will work. This will facilitate a better understanding of what the plan should entail and how both workers and their managers will treat the system of rewards.


Brown, D., & Reilly, P. (2009). Measuring the effectiveness of pay and reward practices. Web.

Eneh, S., & Awara, N. (2016). Strategic human resource management practices and organizational growth: A theoretical perspective. Global Journal of Social Sciences, 15, 27-37.

Johnson, R. (2011). What are the advantages and disadvantages of a pay-for-performance policy. Web.

Todericiu, R., & Serban, A. (2013). Human resource management – from function to strategic partner. Annals of Faculty of Economics, 1(1), 1682-1689.

Yadav, P., & Singh, J. (2014). Paradigm shift in human resource management in present scenario – emerging trends. SUMEDHA Journal of Management, 3(3), 59-72.

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