Sample Paper on Pay For Performance Compensation Plan

Pay For Performance

Pay for performance is an employee’s compensation plan that links compensation with the performance of the employee. Pay for performance is aimed at increasing the productivity of workers as well as improving the efficiency of the organization. Proponents of pay for performance program argue that compensating employees based on their performance will attract and retain better employees in the organization and also motivate employees to improve their performance. Pay for performance has been widely used in the business organization as well as in healthcare system. However, the program remains in the public school system in the US. In some areas pay for performance has been implemented in the public school system (Springer, et al., 2011). For example, in Minnesota some schools giving automatic raises for seniority and base 60% of all pay increases in performance. In Denver, there is an incentive program where teachers get bonuses based on student achievement and for earning national teaching certificates (Springer, et al., 2011). Nevertheless, the plan to implement pay for performance in some areas has failed. In Cincinnati, teachers voted against pay for performance proposal. In Philadelphia, teachers gave their bonus checks to charity organization rather than cashing them. Studies have shown that lack of teacher’s involvement in planning the incentive is the leading factor for the failure of the program (Springer, et al., 2011).

How Organization Measure the Effectiveness of Their Pay-For-Performance Plans

Measuring the effectiveness of pay for performance program in the organization is one of the key challenges for human resource managers. However, there are various ways that have been established to measure the effectiveness of pay for performance plan. One of the primary measures used by organizations performance appraisal (Pattnaik & Basu, 2014). Performance appraisal involves assessing individual performance in an organization. Performance appraisal is usually conducted regularly by completing an assessment tool that document employee’s performance in an organization. In the school setting, performance appraisal of teachers can be done by their supervisors, their colleagues or students. Increase in the performance of employees indicates that the implemented pay for performance is effective in an organization (Pattnaik, & Basu, 2014).

Another tool measuring the effectiveness of pay for performance plan is the evaluating the overall performance of the organization. It is expected that pay for performance should improve the overall performance and productivity of the organization. In the school setting, pay for performance is expected to raise the school performance. Therefore, if the evaluation of school performance indicates that the pay for performance plan is effective. The effectiveness of pay for performance in an organization can also be measured by evaluating the operational cost. Pay for performance aims at improving the productivity of employees and thus the cost of operation should decrease. Therefore, the program is considered effective when the cost of operation has declined. Effectiveness can also be measured by evaluation employee turnover and retention rate. High turnover and retention rate indicate the program is effective (Henry, 2015).

Disadvantages of Using a Pay-For-Performance Plan from an Employee’s Perspective

From the employee’s perspective, there are various disadvantages of implementing pay for performance plan in an organization. A major disadvantage of the plan is that it can lead to employee exploitation. Compensation of workers is based on his or her performance hence the employee can be forced to overwork to earn high payment. Pay for performance also leads to inequalities in the organization. According to Henry (2015), there are high disparities in the salaries of employees since payment is usually based on performance. Pay for performance also leads to employee’s dissatisfaction. The plan requires an employee to maintain constant improving performance. If the performance of employees decreases of other factors, he or she may get little compensation. This may lead to high dissatisfaction and may increase employee turnover (Park & Sturman, 2015).

Disadvantages of Using a Pay-For-Performance Plan from an Employer’s Perspective

From employers, perspective, pay for performance has various disadvantages than can affect the organization. One of the disadvantages is that pay for performance plan usually compromises quality of services. In an organization where they have implemented pay for performance plan, employees are more concerned with improving quantity than quality. As a result, the quality of services in the organization can deteriorate, and this can have a significant impact on the organization. Performance pay can also lead to insufficient motivation. If an employee perceives the amount of incentive to be too low, he or she is less motivated to deliver the maximum level of productivity. In some organization where the plan have been implemented, less motivated employees usually perform to the minimum standard only to retain their job and this can affect the overall performance of the organization (Park, & Sturman, 2015).

It is also difficult in measuring the performance of employees. A lot of time is wasted in trying to set the performance measures and conducting performance appraisal. Additionally, poor performance evaluation can lead to ineffectiveness of the plan. In some instances, supervisors carrying out performance appraisals can be biased to ensure that their favored employees get the incentives. Pay for performance plan also discourages teamwork in the organization. Employees tend to be competing with each other in order to earn high incentives. In some instances, there is a conflict between employees when there is a perception that an employee is hindering the performance of the other (Park & Sturman, 2015).


Although pay for performance is considered as one of motivation method to increase performance and employee productivity in the organization, it has not been fully embraced by several organizations, especially in public school systems. The program has various limitations to both the employees and employers that limit its implementation. For effective implantation of the program in the public school system teachers should be involved in planning to encourage its acceptability (Springer, et al., 2011).



Henry, K. K. (2015). Pay for Performance: Evaluating Performance Appraisal and Merit Pay Increase in the University of Education, Winneba.

Park, S., & Sturman, M. C. (2015). Evaluating Form and Functionality of Pay‐for‐Performance Plans: The Relative Incentive and Sorting Effects of Merit Pay, Bonuses, and Long‐Term Incentives. Human Resource Management.

Pattnaik, S., & Basu, T. (2014). An Aspect of Making Pay-for-Performance Plans. Training & Development Journal, 5(1), 56-64.

Springer, M. G., Ballou, D., Hamilton, L., Le, V. N., Lockwood, J. R., McCaffrey, D. F., … & Stecher, B. M. (2011). Teacher Pay for Performance: Experimental Evidence from the Project on Incentives in Teaching (POINT). Society for Research on Educational Effectiveness.