Incentive Compensation Systems: Strengths and Weaknesses

Pay-for-performance and incentive compensation systems are becoming increasingly popular as a way for companies to directly link employee behavior with desired organizational outcomes. Associated with these systems are several identifiable strengths and weaknesses (Gibson, Ivancevich and Donnelly, 1994).

Some of the strengths of pay-for-performance systems are that they provide tangible results to personalities who are so motivated, they offset employee resentment of tenure-based rewards, and if applied properly, increase and decrease with effort expended. Weaknesses of pay-for-performance techniques include poor goal communication, extrinsic rewards being ineffective motivators for some employees, and the common occurrence that employees do not always notice the connection between behaviors and outcomes.

Regardless of their strengths and weaknesses, pay-for-performance rewards are an essential element of performance evaluation systems. One of the most controversial applications of pay-for-performance reward systems is in the realm of executive compensation. The problems with linking compensation to overall performance of the organization typifies the problem of assessing the outcomes for the organization, positive or negative, and allocating rewards accurately.

In summary, pay-for-performance rewards can be effective in environments where actions that lead to desirable organizational outcomes are neither of high enough quantity nor quality without its presence. However, one could advance the argument that if an employee has to be motivated by extrinsic rewards alone to excel at their position, they may not be the best person for the job.

Reference

Gibson, J.L., Ivancevich, J.M., & Donnelly, J.H., Jr. (1994). Organizations: Behavior, structure, processes (8th ed.). Boston, MA: Irwin.