8/13/2019 rosley C& B

1/16

8/13/2019 rosley C& B

2/16

What is variable pay?

Variable pay is defined as direct compensation that does not become apermanent part of base pay/salary and which may vary in amount fromperiod to period. Other names for variable pay include: incentivecompensation, incentives, bonuses, commissions, cash awards andlump sums.

This system largely implies a pattern where the employer divides anemployees salary into two partsfixed and variable, whereby the fixedpart of the salary is credited to an employee every month and thevariable aspect follows as per the goals and targets achieved.

8/13/2019 rosley C& B

3/16

Categories of Variable Pay Plans

8/13/2019 rosley C& B

4/16

What are the key elements to consider whendesigning a variable pay plan?

1. Assessing the effectiveness of any current variable pay

plan(s) to identify gap areas that need to be addressed inthe new plan.

2. Analyzing any previous employee feedback on variable

pay plans that has been captured. This also ensures thatemployee inputs have been considered while developingthe new plan.

3. Evaluating the best practices and provisions pertaining tothe comparator basket that the organization competes

with talent for.4. Earmarking the budget for the overall variable pay

spending for the financial year and allocating it under thevarious programs (current and new).

8/13/2019 rosley C& B

5/16

Variable pay can be in the form of short-term

(one year or less) or long-term (two years or more)

incentives or bonuses and employee ownership

programs.

8/13/2019 rosley C& B

6/16

What is the difference between short andlong term variable pay plans?

Short Term Variable Pay

This comprises of incentives payable on achievement of presetindividual performance targets which are measured over a time period

of one year.

Short Term Variable Pay might also contain cash bonuses where theperformance criteria or amounts may or may not be specified from the

beginning.

8/13/2019 rosley C& B

7/16

Long Term Variable Pay

Variable Pay that is paid out to an employee by measuringperformance over a period of years and not one performance cycle, is

defined as a Long Term Incentive.

Apart from being used for rewarding performance, long termvariable pay is also often used as a retention tool or even as aretirement benefit when it consists of deferred shares.

8/13/2019 rosley C& B

8/16

Types Of Plans For Variable Pay

Individual-based plans Individual-based plansare the most widely used pay-for-

performance plans in industry.

Merit pay consists of an increase in base pay, normally given once ayear.

Supervisors ratings of employee performance are typically used todetermine the amount of merit pay granted.

Once a merit pay increase is given to an employee, it remains a partof that employees base salary for the rest of his or her tenure withthe firm.

8/13/2019 rosley C& B

9/16

Team-based pay plans Team-based pay plansnormally reward all team members

equally based on group outcomes.

These outcomes may be measured objectively or subjectively.

The criteria for defining a desirable outcome may be broad ornarrow.

Less commonly done in individual-based programs, payments toteam members may be made in the form of a cash bonus or in theform of noncash awards such as trips, time off, or luxury items.

8/13/2019 rosley C& B

10/16

Plantwide or company-wide pay-for-

performance plans

Plantwide or company-wide pay-for-performance plans reward allworkers in a plant or business unit on the basis of the performanceof the entire plant or business unit.

Most corporations have multiple plants or units, a factor thatmakes it difficult to attribute financial gains or losses to any singlesegment of the business.

The performance indicator most frequently used to distributerewards at the plant level is plant or business unit efficiency,

which is normally measured in terms of labor or material costsavings compared to an earlier period or another plant or businessunit.

8/13/2019 rosley C& B

11/16

What are some challenges associated inimplementing variable pay?

Setting the right performance measures

The organization needs to identify and apply the correct set ofperformance parameters which ensure that there is a line ofsight that the employees have pertaining to the linkagebetween their individual goals and the business objectives.

8/13/2019 rosley C& B

12/16

Plan Communication

Sharing the plan and its features with the employees in aproper manner is a challenging exercise.

Another associated challenge is important to ensure that thefairness and objectivity of the plan is communicated in thecorrect manner.

8/13/2019 rosley C& B

13/16

Budget Distribution and Payout Calculations

While variable pay plans primarily reward performance,driving retention and engagement are also importantobjectives of some plans.

Hence distribution of payouts based on the varied purposesthat a plan might have, from a limited budget in order to

suitably reward high potential talent is challenging.

8/13/2019 rosley C& B

14/16

Measuring plan effectiveness

From a financial perspective it is typically easier to measureplan effectiveness since employee performance is linked tobusiness returns.

It is also important to work out the effectiveness of the plan interms of its value to the employee.

8/13/2019 rosley C& B

15/16

Pros and Cons of variable pay

Enables reward cost to be focused on those seen having most value tothe organisation.

Enables pay cost to be more easily varied according to circumstances.

Can help to shape employee behaviours to meet organisationalobjectives (change management)

Little evidence that contribution-based pay systems enhancemotivation (staff surveys).

But such schemes have been found to be associated with improvementsin organisational performance.

May help to ease out poor performers. Such systems do, however, increase management control (through

performance management systems).

No evidence that poor performers improve as a result.

Some ethical issues about transfer of risk from organisation to

individual employees.

8/13/2019 rosley C& B

16/16