The term performance incentive refers to performance-based pay programs where an employee is incentivized and rewarded for achieving higher goals and objectives. Companies have many incentives, some tying pay to individual performance and some to companywide performance. Pay-for-performance plans are very common among organizations. Pay-for-performance is generally given for specific performance results rather than simply the time worked. Here we have talked about performance-linked incentives, their calculation, and more.
What is PLI?
A performance-linked incentive (PLI) is a form of payment from an employer to an employee, which is directly related to the performance output of an employee and which may be specified in an employment contract. PLI may either be open-ended (does not have a fixed ceiling) or close-ended (have an upper ceiling which is normally stipulated in the employment contract). Open-ended incentives are normally applicable to revenue-generating activities (e.g., sales), while close-ended incentives are associated with support functions (e.g., operations, human resources, administration, etc.)
Understanding Performance-Based Compensation
Performance-based compensation rewards an employee for meeting certain performance targets or for high-quality work. It is a reward for their hard work and acts as an acknowledgment of their contribution to the company as well as functioning as an incentive to stay with the company. Most employee bonuses are performance-based compensation.
Performance-based incentive programs are based on the very belief that individuals will expand efforts to achieve performance objectives which they suppose will lead to valued outcomes. Organizations using performance-based incentives enhance their schemes effectively to elicit the desired behavior from their people. It is also a good way to drive a performance-driven culture while emphasizing the values the organization stands for.
PLI vs other financial remuneration
Here we have compared performance-linked incentives with other financial aspects:
PLI vs Salary
|PLI is paid for the results||Salary is paid for the efforts that one puts in|
|PLI is paid in a longer cycle of monthly, quarterly, or half-yearly, yearly||Salary is paid in short, definitive cycles (e.g., weekly, monthly, etc.)|
PLI vs Bonus
|PLI is paid for the individual performance||Bonus is paid for the performance of the organization|
|PLI is normally paid as a percentage of one’s salary, or as a fixed amount of the employee’s performance||Bonus is normally paid yearly or half-yearly|
PLI vs Appraisal
|PLI is paid in a longer cycle of monthly, quarterly, or half-yearly, yearly and is paid for the individual’s performance||Appraisals, normally conducted half-yearly or annually, are used to decide on the salary increments and promotions of the employee|
PLI vs Retention Bonus
|PLI is paid in a longer cycle of monthly, quarterly, or half-yearly, yearly and is paid for the individual’s performance||Normally retention bonus is paid yearly or half-yearly which will incentivize the employee to stay back in the organization for the payment|
Difference between Performance Incentive & Performance Bonus
|Performance Bonus||Performance Incentive|
|These are offered after the completion of the task||These are offered after the completion of the task and pre-determined|
|It is offered with the objective to shared company profits with the employees||It is offered to enhance company loyalty|
|Bonus is generally in cash form and is calculated using the Payment of Bonus Act||Performance-based incentives are given according to the employee’s performance|
|A bonus is not an incentive||An incentive can be a bonus|
Framing Performance-Based Incentives
So, what should organizations focus on while framing performance-based incentive plans? Let us understand.
1. Is your incentive plan optimum? Too small a reward for large gains that the organization may achieve by modeling employee behavior through incentive schemes may not look as exciting for employees, and they may not adopt it fully or get driven towards their competition. On the other hand, too large a reward may not make for a viable business proposition. Your incentive scheme must be just right to help the employees fetch you the desired results at all times.
2. Is your performance incentive plan linked to retention? Having an element of deferred pay-out and linking it to employee retention is a good idea to keep the employees tied to the organization. A high-performing employee will keep on building a fortune in this deferred pay-out format and will always double click his options while contemplating quitting. Here, there is also an advantage to the organization.
3. Is your performance incentive plan triggering the right behavior? Often, we have heard about performance incentive plans going wrong, where it becomes all about moneymaking. Organizations must carefully draft their performance incentive plans to draw people towards the behaviors that they truly value. It could be a combination of input, output, and ethics. Employees need to be rewarded for keeping the company values at bay.
4. Does your performance incentive plan foster cohesion? If the business is such that it warrants interdependencies on various teams, and collaboration amongst various groups of people is highly valued, having a performance incentive plan based on the achievement of team goals can be more effective.
5. Is your performance incentive plan linked to milestones? Linking incentives to milestone achievements helps an organization drive people towards short-term and long-term goals. Incentivizing people for achieving certain milestones and offering a kicker on the usual incentive scheme definitely boosts productivity.
6. Is your performance incentive scheme custom-made? Different people have different needs, and similarly, different roles demand distinct motivators. Drivers for your Acquisition team will have to be different from those of the Upsell team, and never should their goals be overlapping, as you may end up paying two people for the same work. Similarly, an incentive scheme that works for Millennials may not work for Gen Z, because intrinsic motivators of both cohorts will be very different, and thus one size fits approach may not be best suited here.
Frequently Asked Questions (FAQs)
What is Performance incentive pay?
The term “pay-for-performance compensation” refers to performance-based pay programs where an employee is incentivized and rewarded for achieving goals or objectives. Pay-for-performance compensation can come in many varieties depending on your organization’s budget, compensation philosophy, and organizational goals.
Is incentive pay a bonus?
A bonus is non-guaranteed and usually on the spot. An incentive is a plan which is forward-looking. Payment is tied to the achievement of specific objectives that have been pre-determined and communicated to the employees that are on the plan.
What are the disadvantages of using a pay-for-performance plan?
- Employees can be demotivated if the goals set are too hard to achieve
- Too much of the process relies on the quality of judgment made by a manager
- It reduces pay equity and can make a company liable to costly equal pay challenges if not operated fairly
Does performance pay work?
It can be an effective way to motivate your employees and reward them for being more productive. The advantages include increased employee retention, better recruiting, and higher performance.