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1 Making managerial pay contingent on measures of managerial and/or firm performance motivates them to deliver...

1 Making managerial pay contingent on measures of managerial and/or firm performance motivates them to deliver good performance for shareholders. However, it also burdens them with greater risks than they may like. How do organisations balance these two considerations when choosing managerial pay and performance measures?

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Performance based pay, internally motivates the employees as it makes their job intreresting and rewarding. However, there are certain situations wherein it is out of human hands to influence the performance; in such cases a manager's efforts won't be reflected in his performance. Thus the manager will not be motivated to put in extra efforts, resulting decreased profitability. Thus it is beneficial for the company to fix a certain percentage of pay irrespective of performance; in addition to which the organization may reward the managers with financial as well as non-financial effects. In addition, there should be a checkpoint on the manager for taking risks; as in based on their performance and authority, they should only be allowed to take a certain level of risks.

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