This document discusses performance pay in 3 paragraphs: 1) Performance pay is used to attract highly productive workers and motivate workers by tying pay to performance rather than a flat wage. This aligns worker and company interests. 2) There are various types of performance pay like piece rates, commissions, royalties, bonuses, stock options, and profit sharing that pay workers based on amount of work, sales, creative output, company performance, and profits. 3) Efficiency wages that are higher than market wages can attract more productive workers and lower costs through less turnover and training needs as well as less need for supervision.

1. Performance Pay
Compensation Management

2. Prepared By
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Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com

3. Performance Pay
• Many occupations pay a wage
rate that is commensurate
with performance, such as
sales or managerial
occupations. The purpose of
performance pay is to attract
the most highly qualified and
productive workers, or as
economists like to say, workers
with highest marginal revenue
productivity.

4. Performance Pay
• Performance pay is also used
to motivate workers to work.
Many employees paid a flat
wage rate often linger or
dawdle, which lowers their
productivity and the
employer's marginal revenue
product. Dawdling employees
can also lower morale, since
harder working employees
resent being paid the same as
the dawdling employees.

5. Performance Pay
• Performance pay helps to
solve this principal-agent
problem by aligning the
interests of the employees
with that of the owners of
the firm — both want to
make more money.

6. Performance Pay
• There are various types of
performance pay. Piece
rates are paid according to
the amount of work
accomplished. Many
factories use piece rates to
prevent dawdling.

7. Performance Pay
• Commissions are often paid
as a percentage of sales, in
such industries as real
estate, insurance, securities,
and retail sales.

8. Performance Pay
• Royalties are paid to artists
who actually create a
product and, like
commissions, is usually a
percentage of the sales price
of the product. For instance,
authors may receive 10% of
the price of a book for each
book that they sell.

9. Performance Pay
• Bonuses and stock
options are often paid to
executives of the
company so that they
work harder to ensure
that the company will
succeed

10. Performance Pay
• Bonuses are lump sum
payments which are
often paid at the end of
the year after the
employee's performance
can be assessed.

11. Performance Pay
• Stock options align the
interests of executives of
the company with those
of the shareholders — if
their shareholders profit,
then they will too.

12. Performance Pay
• Profit-sharing plans are
often used to pay a
percentage of the firm's
profits to employees so
that they work harder.

13. Performance Pay
• Firms may also pay
efficiency wages, which
are higher than market
wages, to attract more
productive workers.

14. Performance Pay
• Efficiency wages may
lower the firm's cost of
labor by hiring only
productive individuals and
lower turnover, which can
result in a more
experienced workforce.

15. Performance Pay
• Consequently, recruiting and
training costs are also lower.
Good employees also
require less supervision and
monitoring.