Pay-for-performance plans are a method of compensation where workers are paid based on productivity, as opposed to hours spent on the job or at a set salary. They are often used in fields such as sales, where workers rely on commissions and/or bonuses for their income. While this can result in less of a sense of financial security for the employee, there are several advantages for both the employee and employer.
A pay-per-performance plan can sometimes result in situations where the employee may be able to earn a substantial income. A talented salesperson who works strictly on commission may be able to earn more money than a salaried salesperson since he is paid based on the volume of sales. Depending on the compensation structure and the amount of effort put forth, the result could be a six-figure income.
The opportunity to earn a substantial income can lead to increased motivation. Since employees are compensated based on performance, they may be more likely to work harder and longer in order to reach income goals.
Employees who are paid based on their performance are typically judged by results rather than more subjective methods, resulting in increased flexibility. For example, life insurance salespeople often make their own appointments and set their own schedules. They will be evaluated not by how much time they spent working or the sales methods used, but by their sales volume.
From the employer's standpoint, productivity may increase due to the employee's desire to earn a high income. The result can be greater productivity from fewer workers, reducing the employer's labor cost and transferring the financial risk from the employer to the employee.
High-achieving performers who are happy with their income and work environment may be more likely to stay instead of exploring other opportunities. They can also attain a certain level of prestige and respect in the company due to their achievements.