INTRODUCTION – PLAN OF THE REPORT
I have organized my investigation in the following way. In the first issue I introduce the historical background of short history of pay-for-performance system. The second issue handles with particular types of individual pay techniques including ranges, merit pay and incentives. There are given only the main characteristics of each type. The third issue tries to give clear answers on simple questions about pay – for - performance system’s reliability and accuracy. The fourth issue named Negative evidence creates an opposition to pay – for – performance advocates. The last issue as the topic says gives few pros and cons of establishing link between pay and performance.

HISTORICAL BACKGROUND
Traditional approach to compensation, which was focused on financial compensation, is characteristic for 60’s and 70’s of previous century. The stress was on right classifying of employees into pay ranges. They pay grades were precious created. This system was building bureaucracy, sharp hierarchy and vertical communication. Fringe benefits served just like a tool for tax evasion.
In late 80’s was new way of compensation presented. In private sector pay-for-performance started to be applied. Traditional system was being criticized by Lawler as unsuitable for new flexible organizations with not so many levels.
Also the times of stagflation motivated managers to find new ways to the gain competitive advantage. This approach focused more on employees as main source of competitive advantage.

INDIVIDUAL PAY TECHNIQUES
We can divide the pay techniques into several groups depending on the point of view. Here is tabular overview of the main types.

Table 1Pay-for-performance plan classes.
LEVEL OF PERFORMANCE
IndividualGroup
CONTRIBUTIONTO BASESALARYAdded to baseMerit plansRangesSmall group incentives
Not added to baseMerit awardsLump-sum paymentsPiece ratesCommissionsBonusesProfit sharingGainsharingBonuses

Ranges
This technique is not literally pay – for - performance reward. Jobs are classified into some grades according to their heaviness. Pay range is assorted to every grade. Maximum and minimum pay is so defined that it creates a range for pay increasing. The less the number of ranges the wider each range is. It is prevalent that outstanding performer, say, in grade II. can have higher pay than unsatisfactory or even satisfactory employees in grade III. It is easy enough to create ranges therefore is this approach worldwide spread.
When establishing pay ranges organizations usually associate them with job descriptions in the organization. The ranges include the minimum and the maximum amount of money that can be earned per year in that role.
Once ranges are established, the next thing is to decide how employees will move through the range. Seniority pay increases recognize the value of experience, appreciate stable workers. On the other hand, when work force grows older, it happens more expensive without significant growth of productivity. Merit pay increases link pay to job performance. Promotion rewards outstanding performers. This approach helps to keep costs stable.

Merit pay
In comparison with general increase, cost – of – living adjustments (COLA) and seniority increase is merit pay by far the most common for almost 90% employees in USA. It rewards past work behaviors and accomplishments. It is often given as lump-sum or as increments to the base pay. The design of merit programs allows the manager to pay higher amounts (also more often) to the best performers. In addition, unsatisfactory employees can obtain no pay increase. Variation to the merit pay could be merit awards or lump - sum payments.
Merit awards in spite of merit pay do not become a part of the base pay. This gives managers more flexibility and reflects performance more accurately.
Lump – Sum Increase Program (LSIP) is a payment option offering you the flexibility to tailor part of your total compensation to your specific needs. Under this program you can elect to receive all or part of any salary increase – whether merit, promotional, or a special adjustment – in the form of the lump – sum payment.

Incentives
They present the core of pay – for – performance system. In other words, the more you produce, the more you get paid the next month. This system directly links the performance to the compensation.
Individual incentives
In this plan the employee is directly paid for the quality and/or quantity of goods produced. According to Milkovich and Boudreau it takes several forms:
Piecework – an employee is guaranteed an hourly rate (collective bargained sum) for producing the minimum hourly output. For production over this standard, the employer pays so much per piece produced. A variation is differential piece rate, when employer pays a smaller piece rate up to standard and higher piece rate above the standard.
Commissions – are commonly used in sales jobs. It is typically a percentage of the price of the item. A variation is to pay the salesperson a small salary and commission when standard sale is exceeded.
Group incentives
Incentives can also be paid to group of employees. They are used when it is difficult to measure the contribution of each employee to output and/or when team work is important. The performance of the entire group determines the pay increase.
Gainsharing – is more than a group incentive scheme. It is a part of total quality management or philosophy. The main characteristics include costs under employee control, trusting relationship between managers and employees and competent work force. The oldest example is Scanlon plan (first used during 1930’ in steel industry). The rewarding is based on contributions of employees on suggestions which would lead to rise of productivity of work.
Profit sharing – is established as some percentage of profits, which is divided among the employees. The individual pay increase depends on position in hierarchical structure, on age (experience), on individual performance etc. These payments can be also divided more times a year. The point is to identify more closely with company and bring the attention of employees on the profit goals of the company.

EVALUATION OF PAY-FOR-PERFORMANCE SYSTEMS
Is money important?
Money is important only to satisfy one’s needs e.g. physiological, security and esteem needs. If these needs are satisfied by other means, then money is not useful in motivating performance. This fact is not recognized by some managers, who overestimate the importance of money.

Should pay increases be based on performance?
Generally, workers, managers and salespersons believe that pay increases should be mainly based on performance. But especially blue–collar workers often argue against, what could be caused by lack of confidence in proper administration of incentive schemes. On the other hand, it is hard to create the pay–for–performance increase schemes for public sector jobs e.g. teacher. It would be impossible to pay teachers according to performance of their students.

Are Pay Increases Related to Performance?
Research done in recent years in USA show, how is pay tied to performance attractive for most employers and employees as well. Some 82% of researched companies claim the pay-for-performance programs are successful. Despite these findings there is some evidence that organizations are moving away from this type of compensation. However, no one could give us clear answer to given question.

NEGATIVE EVIDENCE
Are incentive programs good for the company or bad for morale? It depends on whether the rewards help support corporate goals, such as increased profit and customer loyalty, or if they merely engender unhealthy competitiveness and back-stabbing among employees. Rewards can also undermine collaboration and teamwork. Well known are cases when craftsmen were stealing parts from other craftsmen to meet quotas.
Incentive programs create competitiveness what is not always necessary to a company. However, some managers claim, that if you want people motivated to do a good job, give them a good job to do.
In addition, money need not be the best motivator of the employees, they can be motivated because they're excited about their jobs or because they're doing something that provides a service to the company or even to the community.
Therefore, some companies offer an unique and creative compensation package that includes bonuses as well as non-cash recognition ranging e.g. from personalized plaques to country ranch parties, movie tickets to golf lessons, team shirts and jackets to footballs and train kits. Despite mountains of evidence to the contrary, many managers still believe that money is more rewarding than recognition and appreciation.
Another problem could be the periodicity of payments. Everyone has a need to be recognized, and not just once a year when there's a formal review process. This problem is significant mainly when talking about gain- and profit sharing plans. To add, employees obtain no financial reward in “bad” years according to profit sharing plans.

PROS AND CONS OF PAYING FOR PERFORMANCE
The following may make you decide against pay – for – performance increases:
§Employees who are motivated by their work's value may find tasks less attractive if cash incentives are involved.
§Many employees like the security of regular salary increases.
§Managers may have difficulty making distinctions between employees' performances and give everyone the same salary increase.
§If salaries only are adjusted once per year, pay-for-performance raises are not immediate motivators.
§Employees may think you are trying to keep compensation low by switching to a pay-for-performance system.
In contrary, the following may help you decide to establish a pay – for – performance system:
§Money can motivate many employees to perform better.
§Top employees may increase their efforts if their contributions are rewarded accordingly.
§A good pay-for-performance plan may make your employees feel more involved in your company's goals.
§A pay-for-performance plan may eliminate surprises during performance evaluations.
§Employees can keep track of their performances and challenge themselves to improve.18

TABLE OF CONTENTS
INTRODUCTION – PLAN OF THE REPORT1
HISTORICAL BACKGROUND1
INDIVIDUAL PAY TECHNIQUES2
Ranges2
Merit pay3
Incentives4
Individual incentives4
Group incentives4
EVALUATION OF PAY-FOR-PERFORMANCE SYSTEMS5
Is money important?5
Should pay increases be based on performance?6
Are Pay Increases Related to Performance?6
NEGATIVE EVIDENCE6
PROS AND CONS OF PAYING FOR PERFORMANCE7
BIOGRAPHY9
TABLE OF CONTENTS10

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Should pay be driven by performance? When and why?