performance-related pay

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Pay related to the output or profits of the employer. This typically takes the form of bonuses over some agreed rate if the firm does well. Pay may be related to the performance of the firm as a whole, to that of a division or part of a firm, or to team or individual results if these can be measured. The argument for performance-related pay is that it provides motivation for effort and cooperation to maximize results for the firm, and that it is good for morale if staff get more when profits are good. An argument against it is that it transfers part of the risks of a firm to its workers, who if they are risk-averse might prefer incomes which were smaller on average, but safer.

Subjects: Economics.

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