What Is a Performance-Based Pay Plan?


When running a company, choosing the proper method of compensating your employees can play a vital role in your company's success overall. One method of compensation that you could use to potentially motivate your employees is performance-based pay. Performance-based pay is a method of compensation that involves paying employees for the work they do instead of paying with a salary or hourly wage.

Performance-Based Pay

  • With this method of compensation, employees are paid depending on how they perform. This could also be referred to as a compensation pay structure in some cases. Performance-based pay could also include other arrangements that involve base pay and incentives based on performance. When employees are paid with commission, they get a percentage of the sales that they generate for the company. In other cases, the employees may be paid based on how many units they produce or perform in some other statistical category.


  • Performance-based pay is also sometimes discussed or used in the education sector. Some argue that performance-based pay should be used for teachers. This way, the teachers would be compensated according to how they teach their students. If the students learn the information and can prove it through testing, the teacher receives higher pay. If the students do not perform well, the teacher will receive less pay. This gives the teacher more of an incentive to pour more resources into teaching the students.


  • One of the major advantages of performance-based pay is that it gives employees more reason to work hard and perform better. When an employee knows that he can be compensated more, he is willing to put more time and effort into his job. When you are paid on salary, you can only be motivated by that amount of money for so long. With performance-based competition, employees work harder and it ultimately rewards the company as well.


  • This form of compensation also has a few potential drawbacks. For example, when the business suffers for reasons outside of the employee's control, it may be harder to perform well. Sales may not come as easily and it can lead to lower paychecks for the employees. This form of compensation also leads to income gaps in society as a whole. Over the years, performance-based compensation has increased while the gap between wealthy and poor has grown. Part of this is due to the fact that those with this pay structure earn more.


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