How Can I Implement a Performance-Based Pay System That Rewards Employees Fairly?

Hi!

I want to implement a performance-based variable pay system in my organization. Can anyone tell me how I can implement the same and how I should consider the organization's performance while giving rewards to employees?

Thanks,
Amit

Amit,

One way to introduce performance-based pay hikes is to keep a band of salary hikes that are kind of assured to an employee with expected performance (say a 3 rater). Based on the ratings one gets in appraisals, they get an additional hike on that basic hike.

For example, a person who gets a rating of 3 out of 5 will get an 8% hike. Now, you could frame something like this:

- A 3.5 rater will get an additional 3%, making it a total of 11%.
- A 4 rater will get an additional 7%, totaling 15%.
- A 4.5 rater will get an additional 10%, totaling 18%, etc.

This will be truly based on the ratings a person receives when their performance is appraised at the year-end and will motivate individuals to perform better in the coming year. It will help distinguish good performers from average performers and reward them accordingly.

Cordially,
Preet

You can try this way.

Normally, performance pay is an annual payment, which will be in lieu of a bonus. This is more like sharing the profit of the business based on the business results and the employee's performance. To calculate the performance pay, the system that we follow is:

Individual performance is rated on a 5-band scale starting from Unsatisfactory to Exceptional, which is factored on a scale of 1 to 10. Company Performance is calculated on various factors, which will be assessed by the Top Management and is on a scale of 1 to 3.

For example: an individual is rated for his performance on the 5-band scale, and his corresponding incentive factor is 7.5. The company is rated 2.7 by the management. His incentive is calculated as follows:

7.5 x 2.7 = 20.25 x Gross Annual Cost / 100

For example, if his Gross Annual Cost is 400,000, his incentive would be 20.25% of his Gross Annual Cost, i.e., Rs. 81,000.

Hope this information is helpful to you.