The Pay-for-performance Model

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During the last 15 years there has been increased debate about refining the role of employee compensation in ensuring performance. Practitioners and academics have been working on various models and innovative ideas relating to compensation methodologies. The profession of compensation experts has seen its custom build rapidly.

In order to build databases and provide benchmarks for corporations, compensation surveys have become very common and are sold for a price. Human Resource departments of most mid-sized and large corporations have worked hard to enhance their knowledge and skills in designing appropriate compensation models. The key question they have been trying to answer is: What would be the appropriate basis for rewarding a person?

The concern has shifted from paying enough to rewarding right. The increasing marketisation of economies has had an impact on the labour market and its reward systems, too. Compensation systems have started reflecting higher levels of discrimination, and large variation in pay packages are now accepted by managers in many corporations and professions. Growth of the people-intensive service industry has furthered fuelled this process.

Expectedly, Indian corporations have also been affected significantly. Compensation systems are getting rigorous attention in many Indian corporations. One outcome of this continuous search for an appropriate compensation concept has been the pay-for-performance system. This system is gaining popularity in India in the more knowledge-intensive firms such as consultancy, investment banking and IT. Others in the old economy businesses are attempting to change over to it too.

Pay-for-performance is essentially trying to move away from the seniority-based compensation system that has prevailed in the corporate world. Its main payment logic is variable pay. The compensation package is divided into a fixed and a variable component. The variable component is linked, through a formula, to the performance of the company, of the group or team with which the individual works, and of the individual. Organisations may have a variant of this system but the concept is the same — individual compensation is linked to the performance of the group and company in addition to her or his performance.