Contingent pay is any form of financial reward that is added to the base rate or paid as a cash bonus and is related to performance, competence, skill or service. Contingent pay may be consolidated in base pay, in which case it forms the basis for allowances such as sick pay and for pension arrangements. Alternatively, schemes other than skill or service-related pay may provide for awards in the form of cash lump sum bonuses. The latter arrangement is called ‘variable pay’. It is sometimes referred to as ‘pay as risk’, which has to be re-earned, as distinct from consolidated pay, which is usually regarded as continuing as long as the person remains in the job and performs it satisfactorily (Armstrong & Murlis 2004).
The most powerful argument for contingent pay is that it is right and proper to recognize achievement with a tangible reward rather than just paying people for ‘being there’ as happens in a service-related system. Pay should be related to contribution, who contributed more and who get more pay (Armstrong & Murlis 2004).
The other arguments commonly used in favor of contingent pay are that:
• It acts as a motivator
• It encourages and supports desired behaviors
• It delivers the message that performance, competence, contribution and skill are important
• It provides a means for defining and agreeing performance and competence expectations
• It can reinforce the organization’s value
• It can help to achieve culture change by, for example, assisting with the development of a performance culture
The extent to which contingent pay schemes motivate is questionable. The amounts available for distribution are usually so small that they cannot act as an incentive. The requirements for success as set out below are extracting and difficult to achieve.
Money can assist in the motivation process but it is a mistake to believe that by itself it will result in sustained motivation. As Kohn (1994) points out, money rarely acts in a crude, behaviorist, Pavlov’s dog manner. People react in widely different ways to any form of motivation. Contingent pay schemes can create more dissatisfaction than satisfaction if they are perceived to be unfair, inadequate or badly managed, as they often are.
The ‘line of sight’ criterion, as originated by Ed Lawler (1995), sums up the key requirement of any contingent pay scheme, especially one related to performance. This is that individuals and terms should have a clear line of sight between what they do and what they will get for doing it.
A line of sight model adapted from Lawler is shown below:
Effect---Performance---Result---Measures---Pay-out
A contingent pay scheme is more likely to motivate people if:
1. The reward is clearly and closely linked to accomplishment or effort people know what they will get if they achieve defined and agreed targets or standards and can track their performance against them.
2. Reward are meaningful
3. Fair and consistent means are available for measuring or assessing performance, competence, contribution or skill
4. People must be able to influence their performance by changing their behavior and they should be able to develop their competences and skills.
5. The reward should follow as closely as possible the accomplishment that generated it.
