Sample Paper on Pay for Performance and Pay for Knowledge Systems

Compensation is a critical component of every organizational strategy because it influences a firm’s performance by attracting top talent, motivating employees, increasing profitability and productivity, and promoting job satisfaction. Keeping the experienced and well-trained employees is an objective of all firms, and business have to provide the right compensation and benefits package to all of its employees to achieve that objective. Essentially, compensation includes employees’ salaries and wages, bonuses, and commission structures and compensation systems encompass pay for performance and pay for the knowledge systems. strategic differences exist between the two systems and various payment plans are used to align with each of these compensation systems.

Pay for performance is not just a pure compensation and benefits system. It is the right mix of the human resource processes that support an organization’s optimal performance and it pays the most performing employees differently from others. Such employees are offered compensation schemes and given career opportunities. Pay for performance not only focuses on an organization’s philosophy to reward the best performing employees but also helps a firm in building a sustainable competitive advantage over its competition. High performing organizations can reach higher profitability levels and retain their best and experienced talents who bring innovative business ideas and solutions. As such, the performance of an entity influences the compensation systems

The “pay for performance” concept is based on numerous factors. These include recruiting and retaining the best performing employees, rewarding value creators, engaging employees in the organization’s success, and communicating and reinforcing a company’s values, goals, and objectives. Recruiting and retaining employees is one of the advantages of pay for performance policies. When employees are rewarded for their performance, they certainly would feel motivated and would not like to leave the job where they feel appreciated and valued (Selden & Sowa, 2011). Moreover, the compensation system largely focuses on rewarding value creators for the new inventions. Another advantage of the pay for performance system is that it engages employees in the organization’s success. Whenever the employees feel motivated, they will certainly strive for excellence and increase an organization’s productivity level. The system also helps an organization in communicating its values and goals to the employees. It represents an organization’s goals and demonstrates the professional values that are required from all the employees.

As opposed to pay for performance systems, in pay for knowledge systems, employees are rewarded for the knowledge or skills they acquire in their practice. Most organizations have designed this compensation system around particular jobs such as human resource management. Traditionally, the system’s wage and salary structure is based on job analyses and evaluations to determine the worth and salary range of a particular job. However, in recent years, organizations have instituted anew pay approach: they pay employees for their knowledge and skills rather than the job they do or particular job groups in which they belong. Additionally, the pay for knowledge system is based on the range of jobs an employee can do rather than what they do (Arnold et al., 2018). Moreover, it may reduce the number of employees an organization requires to complete a particular project and may increase a firm’s productivity. With higher pay and greater diversity of work, this compensation system may lower employees’ turnover and absenteeism, and increase job satisfaction.

A pay for performance system has various essentials. One of these is that it must align performance awards with shareholder objectives. Every organization has a financial responsibility to its shareholders, therefore, an organization should measure the concept of pay for performance compensation just like any other investment. The effectiveness of the system should be evaluated in the context of the financial returns that the firm’s shareholders are expecting (Selden & Sowa, 2011). Moreover, the compensation system must employ the proper mix of compensation elements. Pay for performance compensation should be looked at like any other investment portfolio, in which each component of the system is like an asset class. Therefore, for investment assets to be effective, an organization’s rewards must include the right mix and proportion of compensation plans. Besides, compensation must result in meaningful payments, and organizations should use the pay for method to convince employees to take ownership of the outcomes that their roles exist to produce. Pay for performance systems must also effectively communicate and reinforce rewards to enable corporations to create a long-term focus and commitment amongst the employees. The rewards should be used as a means of reminding employees about what the company expects of them and why it is worth to perform.

The pay for knowledge system’s essentials vary from those of the pay for perforce. For example, the pay for knowledge system comprises various payment schemes. These include depth-oriented base, a breadth-oriented base, and bonus systems. the depth-oriented plans reward employees for increasing their expertise and knowledge on existing skills (Arnold et al., 2018). When employees have expertise and knowledge on particular roles, an organization can reward them by giving them promotions. However, this system may lead to employees being overly specialized and concerned with their profession rather than with the organization’s mission (Arnold et al., 2018). Besides, breadth-oriented lans reward employees for their ability to do different jobs within an organization. The bonus system rewards employees based on their level of knowledge and expertise in a given role. The main goal of this system is to manage and attract highly specialized individuals in various organizational roles and positions.


As opposed to payment plans for pay for knowledge system, pay for performance schemes often combine the fixed base salary with variable pay components, such as stock options or bonuses that vary with an employee’s performance. Companies create special programs to reward employees for their performance. For instance, Intuit Inc has instituted a program called The Spotlight through which the employees are rewarded for specific behavior that meets the reward criteria, such as inventing a new product.  Besides, organizations share their financial gains with employees in what is commonly known as gainsharing, whereby employees receive a portion of profits achieved from their efforts. The amount each employee receives is determined by his or her performance against the organization’s plan. Pay for performance system also constitutes the team-based play that allows managers to build teams within an organization and the teams to be paid based on their performance.

Compensation systems are of significant importance to every organization as they help in increasing an organization’s profitability and promoting employee motivation. the two common types of compensation systems that most organizations have integrated into their operations are pay for performance and pay for knowledge systems. The former focuses on rewarding employees for their contribution to helping an organization help achieve its goals. The latter focuses on rewarding employees for the level of expertise and knowledge they have obtained to perform a given job.


Arnold, A., Fulmer, I., Shaw, J. D., Alterman, V., Arnold, A., Bamberger, P., Woehler, M. L. (2018). Pay Transparency: Advancing Theory and Empirical Knowledge. Academy of Management Proceedings2018(1), 10346. doi: 10.5465/ambpp.2018.10346symposium

Selden, S., & Sowa, J. E. (2011). Performance Management and Appraisal in Human Service Organizations: Management and Staff Perspectives. Public Personnel Management40(3), 251–264. doi: 10.1177/009102601104000305