In contrast to decisions about pay structure, organizations have wide discretion in setting performance related pay, called incentive (variable) pay or pay for performance. Organizations can tie incentive pay to individual performance, profits, or many other measures of success. They select incentives based on their costs, expected influence on performance, and fir with the organization’s broader HR and company policies and goals. Along with wages and salaries, many organizations offer incentive pay – that is, pay specifically designed to energize, direct or influence employee’s behaviour.
Incentive pay is influential because the amount paid is linked to certain predefined behaviour or outcomes. For incentive pay to motivate employees to contribute to the organization’s success, the pay plans must be well designed. In designing the incentive pay plans, organizations should consider whether employees believe they have the ability and resources to meet the performance standards, and whether they value the rewards and think the plan is fair.