Incentive-based pay is used by certain employers to link an employee’s pay to his job performance. The goal of this type of pay is enhanced performance by an employee due to the possibility of increased earning due to his performance. Though there are obvious advantages to incentive-based pay, there are disadvantages as well.

Too Much Focus on Financial Reward

An obvious disadvantage to incentive-based pay and one that resonates through other disadvantages is that there's too much focus on financial reward and not enough focus on other aspects of work. Too much focusing on financial reward can overshadow the developmental needs of an employee. When an employer evaluates an employee’s performance solely on their incentive-based pay performance, other aspects of their development as a profitable employee can be overlooked, which, in the end, can be detrimental to the employer.

Unfair Evaluation of Work Performance

In certain situations where incentive-based pay is implemented, evaluating an employee’s performance can be subjective rather than objective. An example could be a situation in which a line manager or individual supervisor is the one who appraises an employee’s work performance for incentive pay. In this situation, the pay evaluation could be subject to the quality of or the opinion of the supervisor. This could open a door for favoritism, allegations of discrimination and a horde of other dilemmas.

Teamwork Hindered

Employers often depend upon their employees working together as a team; incentive-based pay has the potential to discouraging teamwork. Incentive-based pay can produce a mindset within employees that their job is all about their personal pay and hinder them from seeing the big picture. The big picture is that when someone works for an entity, that entity hasn't been solely established to provide them with an income — it has been established to provide goods or services for use or purchase. Teamwork and cooperation among all employees are required for an employer to accomplish that goal.

Employee Expectations

With incentive-based pay, there's the possibility that employees can expect a bigger payout each year. Realistically speaking, employers may not always be able to increase the payout every year, especially if there's a downturn in the economy. When a bigger payout doesn't happen, employees can become disgruntled, which can hinder work performance or, in a worst-case scenario, leave the company.