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Performance-Based Compensation Structure Plan Essay


In today’s business environment, organizations adopt various forms of compensation structures. A good and effective compensation model plays an important role in the success of organization because it increases employee morale, performance, and productivity (Shimko 30). Two of the most common compensation models include the performance-based model and the base pay model. The main objective of a compensation model is to attract, motivate, and retain employees who are effective in the achievement of organisational goals (Deb 33). There is no single most effective structure that fits all organisations.

Firms choose compensation models based on their needs, objectives and resources. Many firms use the performance-based model because it is effective and flexible. In addition, it allows the remuneration of employees based on the outcomes they achieve in their work and promotes fairness because employees are paid based on their performance (Deb 35). The base pay model promotes fairness but has certain counterproductive results that could affect the output and success of a business. The performance-based model has many benefits that enhance the attraction and retention of competent employees.

The benefits of a performance-based compensation structure

A performance-based compensation system has numerous benefits that will benefits the organisation upon adoption and implementation. First, the structure encourages the adoption of a broader perspective with regard to executing the duties and responsibilities of various job descriptions (Shimko 33). This is possible if the system is used in conjunction with a participatory management style that involves employees in the decision making processes of the organization. In that regard, it promotes cross-training, continuous learning, and the assignment of duties based on the skills of individual employees (Deb 38).

Moreover, it discourages the assignment of duties based on the position an employee holds. This approach leads to fuller understanding of the requirements of various job descriptions and the improvements and changes needed for increased output and performance. In addition, it encourages employees to be more creative and innovative. Second, the structure encourages the development and adoption of a culture of constant improvement (Shimko 33).

The model rewards employees for improving, growing, and attaining new knowledge and skills that improve their output. Third, the system promotes self-management and thus streamlines an organisation’s management. Proper comprehension of the expectations of various job descriptions motivates employees to adopt creative decision and problem solving strategies that are in the best interest of their organisation (Shimko 33).

Rewarding employees for their performance encourages them to be more productive, take on more responsibilities, and embrace teamwork. This reduces the need for oversight because employees guide themselves in the execution of their duties. In addition, it annihilates hierarchy as employees work towards similar performance outcomes (Shimko par 34). Therefore, intragroup teamwork and intergroup collaboration are embraced because of their benefits in facilitating high performance and output (Shimko par 34). Employees maximize their potential and as such reduce the need for managers and supervisors to oversee their activities. That leads to reduction in the costs of employee training and supervision. Fourth, the system improves staff retention because employees are given power to determine the level of their remuneration based on their competencies (Deb 43).

This gives organisations a competitive advantage because many firms apply the base pay compensation model. Finally, it enables employees to embrace change because failure to do so alters their remuneration significantly. On the other hand, changes in business operations and processes necessitate consequent changes in the indicators of effectiveness that determine remuneration. Therefore, under this system, employees are more willing to embrace change.

The risks of a performance-based compensation structure

Despite the numerous benefits of the system, there are several risks associated with it. The system is very complex and requires a high investment in resources on the part of organisations who adopt it (McPhie 2). On the other hand, its complexity means that its effectiveness can be influenced by weaknesses in its design and implementation. Therefore, it can be ineffective in meeting the objectives of an organisation. For example, a firm must have a system in place to identify areas that need improvement and those that need funding for performance-based increases. These activities are both expensive and time consuming. There is need to evaluate the system on a regular basis in order to determine the changes that need to be implemented as the system evolves over time (Deb 46).

A common risk of the performance-based compensation is the propensity to use a single factor to measure the level of performance of a certain job (McPhie 2). This ignores other important factors that are involved in determining the quality of performance and outcome. Research has revealed that the system causes a hostile work attitude in some of the organisations that use it. This emanates from the tendency to compete for the attention of the few customers during periods of low customer turnout. In such cases, only one employee is compensated for the services offered to the customer even though many employees were involved in making the customer satisfied. The system might alter the work environment in ways that are not beneficial to employees and the organisation. For instance, employees could work at unsafe speeds in order to get more work done and thus compromise the quality of their work. On the other hand, the system might only consider a few factors in determining the quality of outcomes (McPhie 2).

Finally, the implementation of the system for the first time might affect the moral of some employees in a negative way (McPhie 2). For example, employees who perform poorly might experience a decrease in compensation because the new structure requires them to perform highly. This could cause disagreements between high performing and low performing employees because high performing employees might prefer the new system because of increased compensation.

Components of the new compensation structure

The new compensation system will be comprised of certain components that include the organisational culture, performance evaluation, funding, fairness, training, supervisors, and system evaluation. The organizational culture involves all the values that the organisation values regarding the behaviours that employees are required to exhibit in various situations and under certain circumstances. The alignment of human resource management practices such as hiring, training, evaluation of performance, and identification of performance indicators are some of the factors that will determine the effectiveness of the system.

It is important to align human resource practices such as performance evaluation and training in order to ensure that employees work towards similar goals and objectives and embrace analogous standards with regard to expected levels of performance. In addition, it will aid supervisors and managers in helping employees develop an organizational culture that values performance. An important aspect of organisational culture is the quality of communication. Encouraging and implementing strategies that facilitate open communication will ensure that employees understand what is required of them and why the change in the pay system is important for them and the organisation (Deb 51).

In addition, they comprehend why they need to adopt a new culture. There is need for both upward and downward passage of information in order to facilitate effective communication. Effective communication enhances trust and therefore augments the effectiveness of employees in executing their duties (Deb 52). Supervisors are needed to implement the system and act as links between employees and management. Their main role is to transform organisational objectives into goals for different job descriptions and facilitate employees’ access to resources that are needed for effective completion of duties.

The system should award supervisors the power to determine pay increases, assign responsibilities, evaluate performance, and allocate rewards as well as resources. In order for supervisors to perform these roles, the system should have a performance evaluation component. The organisation needs an effective and simple performance evaluation system that will help them to monitor employees and determine the quality of their performance. This should happen throughout the assessment cycle in consistent manner in order to ensure the accuracy of interpretations. The system should have mechanisms for supervisors to give accurate and useful feedback to employees and management without delays. Lack of an effective feedback exchange mechanism between supervisors and employees can erode trust between the two groups and as such compromise the effectiveness of the new structure (Deb 56). Another important component of the system is funding.

The effectiveness and reliability of a performance-based compensation system can be affected by lack of adequate funding. In such a system, funding should be available to award bonuses and pay increases to employers who achieve certain objectives based on the organisation’s performance evaluation guide. Another important aspect associated with adequate funding is the readiness of management to allocate enough resources to facilitate the success of the system’s implementation (Deb 57).

Members of the management team who are responsible for evaluating performance must ensure that they allocate resources fairly and make clear distinctions that differentiate various levels of performance within the organisation. Fairness is another critical component of the system. The system should include checks and balances to promote justice and fairness among supervisors when dealing with employees (Deb 58).

Supervisors must be given the power to deal with high and low performers equally without interference from top management. They should have the power to assist poor performers improve as well as determine appropriate disciplinary measures for employees who fail to improve even after receiving assistance. Training is another important component that will equip supervisors and employees with knowledge on how the system is supposed to evaluate and determine different levels of performance. Training is supposed to cultivate trust in employees regarding the functioning of the system and its importance in improving organisational behaviours and outcomes. In addition, it is supposed to make supervisors and employees commit to making the system function well by upholding certain values. Finally, evaluation of the compensation system is a very important component that cannot be ignored. System evaluation is important because it determines whether the system is attaining the desired outcomes and whether it is cost-effective (Deb 59).

Measures such as employee attitudes, motivation, and overall engagement in their duties should be used to evaluate the effects of the system on job satisfaction and performance. If the results are positive then the system is effective. However, if they are negative, the system is ineffective. System evaluations can also be to assess the progress attained with regard to the adoption of a new organisational culture.

An action plan for the implementation of the new structure

The implementation plan for the new system will involve six main steps namely job analysis, development of job descriptions, establishment of base salaries, identification of key performance indicators, measurement and evaluation of success, and development of a criterion for determining bonuses. Job analysis will be conducted to determine the behaviours, skills, knowledge, and traits required for employers to posses in order to be considered fit for certain jobs. This step will involve thorough analysis of different job positions by human resource personnel before the introduction of the new system.

This step will be closely linked to the job description step. The human resource staff will be responsible for describing the roles that employees in various job positions are required to fulfil. The resources need for these two steps include time and money for the remuneration of the human resource staff. In addition, money will be needed to fund the exercise because external agencies could be contracted to implement them. The third step will involve establishing a base salary for each job position. This will be implemented by collecting and analyzing data from the labour market in order to determine the prevailing salaries for various positions offered by different companies (Shimko 34).

Money will be needed to pay the researchers who will conduct research and analyse the data collected. The fourth step will involve the identification of key indicators of determining the effectiveness of practice in the organisation. Examples of indicators could include sales volumes, job satisfaction levels, revenues, and customer satisfaction. This step will be implemented by determining the desired results, identifying specific numbers that will represent the attainment of these results, measuring progress, and determining the amount of change/improvement in different areas. The fifth step will involve the measurement of success in different areas.

This step will be implemented after the adoption of the new system by conducting research studies to determine the attainment of organisational goals and objectives. Time and money will be needed for the effective implementation of this step. The sixth step will involve the determination of the type of rewards for employees, the amount that should be contingent upon performance, the funding of employee compensation, and the management of costs. This step will be implemented by conducting surveys among employees on their preferred methods of compensation as well as their opinions regarding its implementation.

The finance department will be responsible for developing ways of reducing the costs related with the system’s implementation. The final step will involve constant evaluation of the system to determine the necessary changes that need to be made as well as its effectiveness in attaining specific goals. This step will be implemented by top management in association with staff from the human resource department.

Note for submission to the Board of Management on the benefits of the new system

Moving from a job-based to a performance-based compensation system will help the organisation attract and retain key talent. This will happen because employees will have the power to determine their compensation based on their performance. In addition, the system will promote justice and fairness because employees will be evaluated and remunerated based on individual performance of assigned duties.

Employee retention will be supported because employees will be able to increase their salaries by adopting self-management strategies. The system will also create an organisational culture that values teamwork and breaks down hierarchy. Employees will be attracted by that culture because an organisation with minimal restrictions that emanate from hierarchy-related matters values employees and promotes fair treatment of staff members. The new system will eliminate compensation-based problems such as negative attitudes and lack of cooperation from employers who feel that they are not fairly compensated for their contribution to the organisation. The new performance-based compensation system will give employees freedom to determine their earnings, practice their creativity, and innovate. Employee freedom and fair remuneration are an important aspect in attracting and retaining employees.


The effectiveness of a performance-based compensation system depends on several factors that include fair and effective supervision, an organisational culture that supports the system, adequate funding, a checks and balance mechanism to enhance justice and fairness, and a continuous system evaluation. The system is beneficial for the organization because it will attract and retain competent employees by offering fair compensation, giving employees freedom to determine their pay, and annihilate hierarchy that causes negative attitudes and lack of cooperation between employees and management.

Potential risks include related costs, the application of a single measure in determining the effectiveness of practice, ineffectiveness due to weaknesses in some of the system’s components, and the need for many resources. The implementation of the system will require substantial investment of resources that include time, money, and effort. It is important for op management to communicate to employees regarding the importance of the system and how they can use to their advantage.

Works Cited

Deb, Tapomoy. Performance Appraisal and Management. New Delhi: Excel Books India, 2009. Print.

McPhie, Neil. Designing an Effective Pay for Performance Compensation System. 2006. Web.

Shimko, Dale. Choosing a Pay structure that Works for your practice. Family Practice Management 7.2 (2000), 30-34. Print.

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"Performance-Based Compensation Structure Plan." IvyPanda, 2 July 2020, ivypanda.com/essays/performance-based-compensation-structure-plan/.

1. IvyPanda. "Performance-Based Compensation Structure Plan." July 2, 2020. https://ivypanda.com/essays/performance-based-compensation-structure-plan/.


IvyPanda. "Performance-Based Compensation Structure Plan." July 2, 2020. https://ivypanda.com/essays/performance-based-compensation-structure-plan/.


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IvyPanda. (2020) 'Performance-Based Compensation Structure Plan'. 2 July.

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