Performance related pay is remuneration based on the individuals ability to execute tasks. Performance related pay may benchmark the individual against a predefined measure e.g. sales targets, an industry measure e.g. industry recognised qualifications, or even peer performance, e.g. performance rating relative to peers.
The disadvantages of performance related pay include:
- Myopic view of tasks: A narrow definition of tasks that the individual is measured against may lead to individuals focusing on those tasks only e.g. a lifesaver assessed on the number of lives saved, may ignore the need to prevent injuries by removing dangerous objects
- Encouraging the wrong behaviour: For example encouraging sales only, may incentivise teams not to work together
- Disillusionment: Setting targets too high, or on goals that the individual has no control over may lead to a negative effect on performance as the individual believes the goals and hence fair remuneration, is unachievable