Organizations using pay-for-performance policy are able to recruit qualified staff willing to earn extra money from their efforts. The policy also encourages employees who fail to meet set production goals to quit voluntarily -- if employees do not earn a bonus, they are likely to go elsewhere where they can earn a higher fixed salary. As a result, an organization is able to attract and retain people who have the necessary talents to increase the company's productivity and earnings.
Pay-for-performance policies motivate employees to interact frequently with senior management such as supervisors. The interactions help the employees avoid mistakes by seeking advice from the outset on how to solve a problem concerning the project they are handling. This gives the management the opportunity to know the progress made on various projects and encourages team work.
Employers may not be able to accurately calculate pay-for-performance rates to coincide with the business targets, as some workers can be slow at revealing their full potential even after the incentive pay rates are increased. The employer may have to resort to using the previous pay standards, and some employees may decide to leave as a result of the reduction in pay. Economic recessions are another factor that may make an employer reduce the rates; in a recession, the market may not be able to absorb additional goods and services the organization is offering owing to high productivity brought about by the pay incentives policy.
The cost of implementing pay-for-performance policies can be high because the process involves acquisition of information technology machines, software maintenance and data collection. There is also the cost of conducting research to determine the right pay-for-performance scheme; the wrong incentive pay policy might increase the company's wage bill while the employees may fail to attain the set profit targets.