Pay for performance is an incentive based reward scheme where workers are paid (variably) on productivity and achievement of goals as opposed to hours spent on the job.
"Some companies have grand schemes which are complicated, so the employee fails to realize the connection of what he is doing with the reward," Isuru Tillakawardana, Deputy General Manager, Human Resources of Commercial Bank said.
"The challenge is to connect the 'pay for performance scheme' to the overall corporate objectives," he said.
He was addressing senior executives at the 10th LBR – LBO CFO Forum titled "Pay for performance: Does it work always?"
Reward based performance schemes are widely used by high performing and progressive corporates to encourage employees meet goals and to pay the productive employees who do the most for the business than others.
"The concept of rewarding performance is the corner stone of most progressive organizations as it creates internal equity and creates adjustments between risk takers, shareholders as well as stakeholders including employees," Ronnie Peiris, Chief financial officer of John Keells Plc said.
However, studies have shown that waving a carrot at your employees to get them reach targets could backfire as they start banking on extra cash creating sustainability issues.
Experts say employees who will initially be content with the scheme may start resisting as managers adjust targets for the next stage claiming that the pay is an entitlement.
Performance based pay schemes can also drive employees to focus excessively on hitting targets to gain rewards at the expense of other things that would help the organization.
It can cast a shadow over self-esteem, teamwork, and creativity of employees and lead to increased frustration among individuals and teams.
Peiris said its performance management system at John Keells Holdings is based on the core values of trust, integrity, excellence, caring and empathy.
"If people don’t live by those values irrespective of their operational performance they will be marked down," Peiris said.
Tillakawardana said performance based reward schemes should be transparent and clearly communicated to employees if the organization expects to change the employee's behavior to become more productive.
"Sometimes pay performance schemes are there but not very well communicated. End of the year no one knows how it has been worked out," Tillakawardana said.
"This has no effect because you are not driving or influencing the bahaviour of the individual right throughout the year," he said.