An individual's job qualifications, abilities, skills, and prior experiences are determining factors. For example, an employee who has been at an organization for five years and performed well should not be compensated at the same level as a new hire. However, in principle, compensation must be designed around the job, not the person (Klein, 2006). Person-based pay frequently results in discriminatory practices, which violates Title VII of the Civil Rights Act, and job-based compensation is the employer's most powerful defense in court.
As the market becomes more dynamic and competitive, organizations are trying harder to maintain labor dollars and improve organizational performance. Since organizations cannot afford to continually increase wages by a certain percentage, they are introducing many innovative compensation plans tied to performance.
In the traditional sense, pay is considered entitlement that employees deserve in exchange for showing up at work and doing well enough to avoid being fired. While base pay is given to employees regardless of performance, incentives and bonuses are extra rewards given in appreciation of their extra efforts. Pay-for-performance is a new movement away from this entitlement concept (Milkovitch, 2011)
A pay-for-performance plan increases even the base pay to reflect how highly employees are rated on a performance evaluation. Other incentives and bonuses are calculated based on this new merit pay, resulting in