Establishing an effective pay-for-performance compensation plan requires much thought and planning. Those involved in designing the plan must have a good understanding of the “company’s mission, business goals and strategic objectives” (Ryan, 2013, p. 26). In addition, successful pay-for-performance plans take into account the diversity in the workforce. For example, individuals from the baby boomer generation are motivated by monetary incentives, while younger employees are more interested in career-development opportunities (Yerre, 2012, para. 10). In many organizations, talent management is an important factor in developing pay-for-performance plans since attracting and retaining top performers is significant to its long-term success. Furthermore, according to Jim Kochanski, senior vice president at Sibson Consulting, “real pay for performance rewards top-performing staff differentially and can be extremely meaningful for an organization if done right” (as cited by Mi...
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... Furthermore, in today’s economy, determining what must be done in the future accurately enough for a pay-for-performance plan to work well is impossible (Frey & Osterloh, 2012, para. 4).
Overall, pay-for-performance compensation plans sound like a great way to motivate and pay employees fairly. However, most companies fail to take the time to understand how to properly implement such a plan. Furthermore, although there are metrics that companies can utilize to measure the effectiveness of plans, organizations rarely take the time to do so. Consequently, both companies and employees find that there are several disadvantages of pay-for-performance plans. Ironically, many of these problems are the same for both the employer and the employee. As a result, pay-for-performance compensation plans are seldom the best choice for an organization’s compensation plan.
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