Recently, a HR.com member used the chat function to ask the following question: “Is pay-for-performance and short term incentives the same?”

Short term incentives can include cash and non-cash rewards, while pay for performance refers only to financial compensation.

According to the ERI Distance Learning Center, the following definitions apply:

Short-Term Incentives are “Rewards, which are based on the achievement of short-term goals (typically 12 months or less).”

Pay for Performance refers to the practice of “Paying employees based upon their performance level. Employees are evaluated via performance appraisals and given raises based upon their performance ratings. Poorly performing employees have their wages frozen; they are not given wage cuts.”

As compensation experts Patricia K. Zingheim and Jay R. Schuster suggest, an employee’s role will dictate whether long-term or short-term incentives should be used. For example, they write that “Good executive compensation governance suggests that a substantial portion of the total compensation of members of the senior executive team should be based more on long-term incentives based on key overall company measures of performance and less on short-term or annual incentives, base salaries and executive benefits and/or perquisites.” They also point out, however, that “every employee should influence some key measure of short-term performance.”

The type of organization may also have an impact upon the use of short-term incentives or pay-for-performance. A 2007 study by WorldatWork and Vivient Consulting found that “Private companies rely more heavily on short-term incentives, such as bonuses, than long-term incentives to reward and motivate employees.”

Furthermore, long-term rewards and incentives may be used in conjunction with short-term incentives. As always, proper planning needs to take place before a program is implemented.

For additional information on rewards, the following government page contains a wealth of information.

Consequently, my response to the initial question is "it depends." Variable pay can be based upon short-term objectives, therefore, in this respect short-term incentives and pay-for-performance can be the same. Depending upon the way incentives are awarded and defined, however, short-term incentives and pay-for-performance can be very separate entities. Both play an important role when it comes to improving employee performance.


References:

Steptoe & Johnson PLLC. “Designing an Incentive Compensation Plan.” M Lee Smith Publishers LLC. (Excerpted from West Virginia Employment Law Letter) [crm.hr.com]. January 13, 2007.

WorldatWork. “Private Companies Rely on Short-Term Incentives to Reward Employees, WorldatWork Finds.” PR Web [crm.hr.com]. October 18, 2007.

Zingheim, Patricia K. and Jay R. Schuster. “What Are Key Pay Issues Right Now?” Compensation and Benefits Review, May/June 2007, pp. 51-55.