After reading this article you will learn about the relationship between pay and performance of employees.

People work to earn money that satisfies their needs. Financial incentives are important rewards that motivate employees to exhibit high level of performance. Employees want their good work to be appreciated and appropriately compensated by employers.

They want to be paid commensurate with the quality of their job performance. It requires a carefully constructed pay programme, commitment from supervisors, and well-designed communication to employees about their pay.

However, many employees believe there is no clear relationship between the pay and job performance:


1. Most employees believe that their performance is above average.

2. They feel they are not adequately paid compared to those performing similar work in other organizations. They also believe their pay is below the level of their job performance.

3. Employees often perceive there are poor performers in the organization who are earning as much as they earn.

4. Supervisors do not differentiate between poor, average and above average performers. They take the simple way out and give everyone the same pay increase each year.


5. Employees feel that tying pay to performance is important to them particularly in unionized organizations where the union has negotiated contracts that require their employer to relate pay increases to years of service rather than performance. Pay-for-performance are compensation plans where employees are paid on the basis of their performance.

Some of the performance measures can be:

(i) Individual productivity,

(ii) Team or work group productivity,


(iii) Departmental productivity, and 

(iv) Overall organizational performance.

Pay related to performance can be in the form of piece rate pay plans, wage incentive plans, profit sharing plans on lump-sum bonus. Employees perceive strong relationship between their performance and the rewards they receive.

If they are rewarded for good performance, they would reinforce their efforts towards maximising organizational output. If the rewards are linked only with non-performance factors like seniority, job titles etc. and not to performance measures, their performance may go down.


The pay-for-performance programmes are gaining wide popularity in the corporate sector. Most of the large companies adopt pay-for-performance plans for their employees. Empirical evidence shows that companies that adopt pay-for-performance programmes report better profits, sales and customer satisfaction than those where pay is linked to time and not performance.

How to relate pay to performance:

Employers can relate pay to job performance in the following ways:

1. They should make pay-for-performance philosophy clear to employees. Employees generally believe that above average performers should receive higher pay increases than average performers. Management, however, may not feel the same as there may not be enough reasons for them to link pay with performance.


There may be few major differences between how employees perform their jobs and it may be difficult for managers to measure differences in job performance. Linking pay with performance may be inconsistent with management’s philosophy. Management should explain to employees their intention about whether or not they intend to link pay to job performance.

2. Management should pay bonus rather than increase pay. Pay increases are costly as they increase employer’s expenses every year. One-time payment of bonus is less expensive and can have the same motivational impact on job performance as the financial motivators.

3. Management should rate supervisors on how well they rate their subordinates. Supervisors may give high rating to employees of their work group and rank them as good performers to increase their pay. Managers should train the supervisors on how to conduct performance ratings and base supervisor’s pay also on the quality of ratings they give to workers.

4. It should train supervisors on how they should talk about pay increase. Supervisors should convey the message in a way that employees feel they are being rewarded for good performance. If organizations cannot pay high incentives for good job performance, the supervisors may say, “I wish the company could pay you more, but at present we cannot pay you more than 7 percent.” A better way of saying this is “The management is delighted to increase your pay by 7 percent due to your good performance last year.”


5. It should use objective criteria for rating job performance such as sales, customer contacts, quality, productivity etc. and not subjective criteria like personal biases, favouritism etc.

6. It should convert poor performers into good performers. Poor performers should be trained and disciplined to perform their jobs well to come at par with good performers.