A concept Michael Ovitz might hate.

It's not a new idea, but it is still a progressive concept in human resource development: pay-for-performance. And it is a concept that more and more companies should consider implementing.

Pay-for-performance links employee compensation to individual performance and has long been utilized as an incentive for salespeople and executives. It is beginning to make sense for more and more businesses today.

Pay-for-performance is one of the many buzz terms circulating in business today. There are plenty of companies that utilize pay-for-performance policies, but there are many questions about how they run their policies.

How are they deciding who is performing? What are their standards? What are their measurements? These questions can be answered as follows: productivity of the employee, quality of the employee's work, and the employee's contribution to the company's success.

As chief financial officer of a $50 million privately owned company for the last five years, I had the opportunity to initiate and implement a pay-for-performance policy affecting 250 employees. As the senior financial executive, I considered pay-for-performance an important and key component to the company's bottom line.

I had been concerned with the dual Objectives of controlling corporate overhead and keeping employees motivated and productive, and I believed that the pay-for-performance salary policy solved these issues.

The way companies can attract and keep talented, productive workers is to revamp the entire pay structure to reward employees for their individual performance.

Under pay-for-performance, employees who perform well are rewarded with bonuses and/or raises, while those employees who are not performing well are given small raises or no raises.

The pay-for-performance salary policy puts less emphasis on tenure and entitlement while encouraging all aspects of performance, including excellence, competition, creativity, and efficiency. It creates work-force pride and dedication to job excellence.

Here is how a pay-for-performance plan might work: Each department manager ranks the employees in their department based on performance. Each manager receives a budget for increases which totals 3 to 5 percent of the department salaries. The manager gives the increases to the employees according to performance.

For example, if a manager has 10 employees in a department, the three employees who are ranked highest may get a 10 percent raise or more. The four employees ranking in the middle would get a 3 to 5 percent raise. The three employees ranking lowest would get no increase at all.

Of course, one could be flexible with smaller departments or departments with a few employees in lower salary ranges, in that those employees would get more than the company average if they performed well. For example, a 10 percent raise on a $20,000 annual salary may not seem like an outstanding reward, so a raise of more than 10 percent would be recommended in this case.

Even with some flexibility, the total company increases could be kept to 3 to 5 percent of all salaries. Therefore, the pay-for-performance salary policy would cost no more than the current cost-of-living salary policy. The cost would be the same, but the raises would be redistributed to reward good performers.

Meanwhile, it is necessary to make time to assist the managers in evaluating their staff and in explaining the new policy. The benefits of this salary policy change are that the company retains its top performers, encourages all employees to excel, and sends a message to poor performers.

Pay-for-performance policies are becoming increasingly popular because traditional pay systems are inflationary and don't reward employees for performance. The success of an incentive pay system generally depends on its fairness and its acceptance by employees. Consequently, such systems should be designed through worker-management collaboration and be phased in gradually.

It is difficult enough to recruit good employees, but even more of a challenge to replace your top performers. For these many reasons, it is essential that a company have pay-for-performance in order to be successful in this highly competitive marketplace.

Mark Bestow is a certified public accountant and corporate controller of Los Angeles-based Petersen Publishing Co. LLC.