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This question is about pay for performance.
What is the most common type of pay for performance used by firms?
The most common type of pay for performance used by firms is merit pay increases. This compensation framework usually gives employees annual salary increases in degrees that are based on their performance reviews.
With this method, top-performers will get a larger percentage increase than lower-performing employees will. While this provides some amount of incentive for employees to perform well, it doesn't provide a lot, and it's used more as a way to retain employees than to motivate them.
Companies who want to increase performance incentives will use a combination of merit pay increases and variable pay programs, which provide merit-based bonuses multiple times a year.
Employees may know that they'll get these bonuses if they meet certain criteria, or they may receive them without warning as a reward for a job well done on a particular project.
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