Variable Pay: What To Use And When

Variable pay is defined as employee compensation that changes as compared to salary which is paid in equal proportions throughout the year.* Variable pay can be used to reward an employee on exceeding expected performance, on increasing company profitability, or meeting company goals.  With 92% of employers implementing a variable pay plan,** it is important to know the different rewards plans and when to use them.

Why Use Variable Pay
According to The Hay Group, the top driver for changing or adopting variable pay programs is to better align programs with the business strategy (69% U.S.).  In the U.S., other top drivers are to create better line of sight between corporate and individual performance (39%), to improve organizational or team performance (37%) and to ensure market competitiveness (30%).*** Variable pay allows companies to better align their company goals with their employees’ performance.  Linking goals to pay shows employees what is expected of them and how their actions can impact the company at large.  Because of the unstable economy many companies are adopting variable pay programs or reevaluating the one they currently have in place.  

Which Is Right For Me?
Variable pay programs contain 2 primary categories, recognition awards and incentive awards.  Recognition plans provide after-the-fact reinforcement of an employee going above and beyond his or her job description to contribute to the success of the company.  Recognition plans are the most widely used form of variable pay programs used in the United States and can come in a variety of forms such as cash, time off, or even a simple thank you.  These plans are based on subjective criteria and can be determined by management or fellow employees but do require constant renewal to maintain their link to company objectives.  Recognition plans are very helpful when wanting to create a positive atmosphere that reinforces an employee’s contribution to the organization. 

Next is incentive plans, which are awards programs meant to reward employees who achieve set business goals.  Unlike recognition programs which are after-the-fact, incentive plans are announced before the measurement period begins and are not subjective.  The primary objective of incentive rewards is to increase employee performance in order to meet company goals.  The goals can be either short term or long term and can range from increasing profits or productivity to reducing costs or turnaround time.  The most common reward for an incentive plan is a cash bonus.

Conclusion  
Whichever plan you choose, it is important to always align awards with company goals. This shows employees what is most valuable to your organization and provides a sense of direction to employees on which objectives are important to accomplish.  

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Resources
*http://humanresources.about.com/od/glossaryv/g/variable_pay.htm
**http://www.shrm.org/hrdisciplines/compensation/articles/pages/consistentpay.aspx
*** http://www.worldatwork.org/waw/adimComment?id=3925