A “traditional” approach in implementing reward systems is to reward employees the positions they fill and not necessarily by how they do their work. In other words, employees are rewarded for filling a specific slot in the organizational hierarchy. In such traditional pay systems, one’s job directly determines pay and indirectly determines benefits and incentives received.

In a traditional reward system, each of these positions would have a minimum, midpoint, and the maximum base salary. Contingent pay (CP), also called pay for performance, means that individuals are rewarded based on how well they perform on the job. Thus, employees receive increases in pay based wholly or partly on job performance.

These increases can either be added to an employee’s base salary or can be a one-time bonus. Originally, CP plans were used only for top management. Gradually, their use has extended to sales jobs and become more pervasive overall. A remarkable change in the past two decades has been a steady decrease in base pay and an increase in different types of variable pay. This highlights the increased importance of having a good performance management system that yields useful and fair information for making decisions about the allocation of rewards.