Total Rewards & Pay-for-Performance

Abstract

Compensation is an integral and decisive factor in employment relationship and hence an imperative part of the strategic thrust of human resource management. Pay-for-performance, total rewards etc are the latest buzzwords in the compensation world. Hypothetically, performance linked pay should improve organization performance and individual income. Yet, the compensation literature does not offer conclusive evidence for pay-performance sensitivity. This paper reviews various theoretical and empirical studies on pay for performance with an objective to find reasons for the missing link, if any. Major conclusions from the review include: 1) empirical findings support the incentive effects of pay; 2) criticisms against effectiveness of variable pay is majorly grounded in performance measurement issues; 3) in most instances, implementation or design issues caused failure of variable plans; and 4) success of pay-for-performance is contingent upon various individual, organizational and situational factors.