What Are the Advantages & Disadvantages of a Pay-for-Performance Policy?

Pay-for-performance plans reward employees based on their productivity. Many companies partially or fully tie employee wages to their performance. Implementing pay-for-performance policies in business offers advantages and disadvantages to companies and employees. Management and workers should understand the pay-for-performance pros and cons to decide if the pay structure is right for them.

Companies operating with a pay-for-performance policy experience a decrease in the need for employee supervision. Employees show initiative because they know their work output is directly linked to their pay. When workers meet or exceed their goals, the company benefits from their hard work.

Highly motivated employees can be trusted to get the job done without constant reminders. Companies can function with fewer supervisors, which saves them money in overhead cost. Some businesses find pay-for-performance plans advantageous because the policies usually result higher morale and increased productivity, which helps them increase profits and support the company's bottom line, according to Indeed Career Guide.

Pay-for-performance plans allow employees to increase their earnings because they are in control of their wages. For example, if an employer pays employees commission-only salaries, an employee's earnings are solely dependent upon his success. During certain times of the year, such as holiday seasons, employees can increase production in an effort to earn extra money.

High performing employees take pride in their work and strive to do their best. They enjoy the excitement of uncapped earning potential. Not only does an increase in earnings benefit the employee but also the employer because of strong sales, increased revenue and expansion into new territories, for example.

Another advantage of pay-for-performance policies is an increase in employee retention. An employee is not likely to leave a job where he earns extra income. Lower turnover of employees reduces the time and expense of recruiting, hiring, onboarding and training replacement workers.

Employees who possess the ability to earn bonuses based on performances usually have high morale because they feel as though the company is rewarding their efforts. Welp Magazine suggests that employees working under a pay for performance plan are more likely to feel they have a stake in making the company prosperous.

Performance based pay disadvantages include the possibility of contention among employees. Employees who are not earning bonuses can show jealousy toward those who are earning performance bonuses. Jealousy and contention create hostile work environments, which can reduce productivity.

A worker may feel as though a manager shows favoritism to certain employees to help them achieve bonuses and higher salaries, according to the Lindenberger Group. Upper management must ensure that supervisors are treating employees fairly and consistently or the plan could backfire. Verbal and written communication regarding merit pay, bonuses and commissions should be clear and transparent.

Another disadvantage of pay-for-performance policies is that they can cause employees to fear giving managers their input for changes. Employees hold back their input even if their ideas are good because they are concerned about a reduction in earnings. Many companies value and depend on the input of their employees to make decisions regarding the company. Management must work harder to reassure employees that they can speak their mind without repercussions.

Another disadvantage of pay-for-performance plans is that employees are often resistant to company changes. Workers fear changes in operating procedures will cause a decrease in productivity. Companies that make changes despite employee resistance often experience a decrease in production because of a lack of motivation from some employees. Managers can reduce employees' resistance to changes by providing adequate training and explaining the benefits of the changes.