The Pay-for-Performance System
The pay-for-performance system of rewarding employees is becoming more and more popular among businesses nowadays. According to this philosophy, pay disparities are a reflection of performance differences (Mathis & Jackson, 2011).
Methods of Implementation
Pay-for-performance can be implemented by corporations in a variety of methods, such as commission, bonus plans, and stock options. Each of these sources of payment is dependent on performance. Individual-based performance is exemplified by the Commission, whereas bonus plans can be either group- or organization-based. Because they are granted to people depending on the success of the entire company, stock options are distinctive. The purpose of these performance rewards is to boost output (Hasnain & Pierskalla, 2012).
Apple's Use of Stock Options
Apple has employed stock options for a long time, but recently they have increased the use of these options. Stock options are complicated, but they are based on the idea of performance incentives. An employee, normally upper management, has stock options that state, in 3 years, the company will allow you to purchase the stock at the current trading price. So if a stock is trading at $100 today, and in 3 years it is at $200, the employee can purchase a large amount of stock for $100. This provides the employee with an automatic 100% return and this is the reason this is a performance-based method.
Shareholder Value and Performance-Based Compensation
The incentive is that if the company does poorly over the next three years, it is unlikely the stock will rise much, making the option less valuable. Apple is currently the most valuable company in the world, according to their market capitalization. Apple kept their CEO pay by their peers in the technology sector, but as Apple began to grow, it was a good time to tie the pay for management to the shareholder value the company creates. As a result, Apple's management team is highly compensated in stock options. When this happens in a company, the executives become much more aware of the shareholders. Simply put, the executives and shareholders are in the same boat now. If shareholders are not making money, management is not making much money. Apple decided they wanted to be more shareholder-oriented and this is what encouraged the change to a more performance-based compensation model.
The Success of Apple's Pay-for-Performance Model
The result has been successful. The pay package total for Tim Cook, Apple's CEO, has shown a strong, positive correlation with shareholder value. In fact, Apple's pay rates and shareholder value correlation is the highest of any company. This is the perfect picture of pay-for-performance, and it is exactly what Apple hoped to achieve.
A Biblical Perspective on Pay-for-Performance
Being rewarded for performance can be seen in the Bible as well. Paul writes to the Romans that God will repay each according to what he has done (Romans 2:6). While this is talking about good works, sin, and living holy, it shows that the effort we put in and our performance should be rewarded accordingly. This is not only something that should be implemented by companies, but it is also something God has implemented. Moving to a pay-for-performance method can greatly increase productivity and lead to great shareholder value, as seen through Apple.
References
Hasnain, Z., & Pierskalla Henryk, N. (2012). Performance-related pay in the public sector: a review of theory and evidence. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2043471
Mathis, R. L., & Jackson, J. H. (2011). Human resource management (14th ed.). Mason, OH: South-Western Cengage Learning. http://blogs.wsj.com/riskandcompliance/2015/02/27/apples-pay-forperformance-formula-works-there-not-elsewhere/
