The pay-for-performance method refers to a payment strategy based on using salary or bonuses to improve employee performance. The idea of this approach views rewards as the driver of behavior. In other words, incentives can enhance employees’ engagement and, as a result, the company’s productivity and efficiency. As stated in the Bible, “now to the one who works, his wages are not counted as a gift but as his due” (Romans 4:4). One could interpret it as a statement that workers must be rewarded for their effort. Generally, there are several pay-for-performance methods, including individual-, the group-, and organizational-level compensation programs. General Electric (GE) is a company that has recently implemented an individual pay-for-performance strategy.
Unlike the standard model of systematic entitlements, the performance-based method implements a fair approach to employee compensation. Some companies choose to switch to paying for performance as a means of improving the company productivity. In particular, General Electric has recently decided to cancel its practice of giving cash bonuses to top executives. There was an important reason for introducing such an approach. According to Langfelder (2018), the CEO, “John Flannery, … received $9 million in total compensation for 2017” when the company had to cut thousands of jobs and reduce the dividend by $4 billion (para. 1).
It is hardly a fair payment when a company is going through a crisis. Therefore, GE recognized the need for change in 2018 after having paid cash bonuses to its executives for 125 years (Langfelder, 2018). The unfair approach and lack of effective distribution of resources made the change necessary.
General Electric laid out the principles and purpose of its new executive incentive strategy in a publicly accessible plan. The company rationale for the performance-based bonus system was defined by the need to engage eligible executive leaders in improving the company’s financial, strategic, and operating objectives during a year plan. As reported by General Electric (2018), the first step of the process includes establishing “target, maximum and threshold incentive amounts for the Company and each business unit based on the Company’s … goals” (para. 12). Then, GE assesses the executives’ performance against the metrics at the end of the year. There are different factors that the company can consider when evaluating individual performance, such as leadership, discipline, integrity, and others.
A compensation committee was created to manage and administer the plan developed by General Electric. The steps to its implementation included determining eligible candidates and the amount of bonus compensation, as well as setting performance goals and evaluating their achievement (General Electric, 2018). As reported by Hansen (2021), 2019, the year after the plan implementation, “was a good year for GE and saw positive news compared to the previous years in which it was struggling” (para. 19). However, since the company only introduced its performance-based pay system two years ago, it is difficult to evaluate its long-term effects on productivity so far.
To summarize, performance-based compensation aims to reward employees for achieving objectives and improving the company’s efficiency. It is opposed to the strategy of systematic payments and bonuses provided to employees regularly. General Electric has recently switched to individual performance-based bonuses instead of cash incentives paid to its top executives. The company’s decision was based on the fact that a merit-based system can improve the delivery of financial and strategic goals, contrary to systematic entitlements. Such an approach can optimize each unit’s efficiency and consider the individual efforts of the employees, rewarding them appropriately.
References
General Electric. (2018). General Electric company annual executive incentive plan. Web.
Hansen, S. (2021). The rise and fall of General Electric (GE). Investopedia. Web.
Langfelder, N. (2018). Did one of America’s largest corporations just switch to a pay-for-performance model? Connex Partners. Web.