A performance-linked incentive (PLI) is a form of payment from an employer to an employee, which is directly related to the performance output of an employee and which may be specified in an employment contract. PLI may either be open-ended (does not have a fixed ceiling) or close-ended (has an upper ceiling which is normally stipulated in the employment contract).
Open-ended incentives are normally applicable to revenue-generating activities (e.g., sales), while close-ended incentives are associated with support functions (e.g., operations, human resources, administration, etc.)
PLI vs other financial remuneration
PLI vs salary
Salary is paid for the efforts that one puts in and PLI is paid for the results. Salary is paid in short, definitive cycles (e.g., weekly, monthly, fortnightly etc.) while PLI is paid in a longer cycle of monthly, quarterly or half-yearly,yearly.
PLI vs bonus
Bonus is paid for the performance of the organization while PLI is paid for the individual's performance. Bonus is normally paid yearly or half-yearly. This is normally paid as a percentage of one's salary, or as a fixed amount, of the employee's individual performance.
PLI vs retention bonus
Some organizations give a retention bonus which is payable for the period that an employee stays back in the organization. This is paid for the value added by the employee by virtue of mere presence and not necessary for the efforts or work output. Normally retention bonus is paid yearly or half-yearly which will incentivise the employee to stay back in the organization for the payment
Method of calculating PLI
PLI, by virtue of being sanctified in the employment contract, is paid for objective, measurable and visible results. Management by objectives is generally used to define the output which determines the payment of PLI. Since PLI is paid for the results and not merely for the efforts, the objects should be chosen to reflect those activities whose results are visible immediately after the effort.
Also, in calculating PLI, only the performance and not the potential of the employee should be considered. Potential of the employee is normally subjective and can be contested. PLI should be based on metrics which are absolutely objective and clearly perceived as fair by both employee and employer.
PLI vs Appraisal
Appraisals, normally conducted half-yearly or annually, are used to decide on the salary increments and promotions of the employee. These, being permanent increases, take both the performance and potential of the employee into account.
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