Compensation Management

5th Chapter
1. Variable Pay
Variable pay is compensation awarded to employees based on their performance. This is a cash
incentive to help encourage employees to be productive and achieve their goals. Companies may
choose a variety of ways to give variable pay, and not all forms are monetary.

2. Different types of Variable pay

i. Commission: A commission is a fee paid to a salesperson in exchange for
services in facilitating or completing a sale transaction. The commission may
be structured as a flat fee, or as a percentage of the revenue, gross margin, or
profit generated by the sale.
ii. Profit Sharing Plan: A profit-sharing plan is a retirement plan that gives
employees a share in the profits of a company.
iii. Bonus: A bonus payment is usually made to employees in addition to their base
salary as part of their wages or salary.
iv. Stock Option: The term employee stock option (ESO) refers to a type of equity
compensation granted by companies to their employees and executives. Rather
than granting shares of stock directly, the company gives derivative options on
the stock instead

3. Benefits of Variable Pay

i. Increase Productivity: Performance-based pay gives employees an incentive to
improve their individual performance. If the IC plan is not driving better
business results (revenue, user growth, etc.), then it is a waste of resources.
ii. Improve employee engagement & retention: Variable compensation helps
talented employees earn more, which helps to improve retention and
engagement. But a badly managed sales compensation plan could have the
opposite effect.
iii. Correlation of performance with income: Variable compensation — such as
commission — correlates performance with income. Employees can see and
quantify the value they add to their employer and vice versa.
iv. Financial flexibility: Flexible pay allows employers to pay employees after
they have generated revenue. That means that employers don’t need cash to pay
new reps upfront. It also helps to align expenditure with income.

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 4. Who receive Variable Pay
Here are common groups that may earn a form of variable pay:
i. Risk takers: Employers may reward hazardous labor with variable pay. This
may include crane operators, loggers and construction steel laborers. Variable
pay may reward work and motivate employees to take risks for a monetary
award. Most often, risk-takers can earn differential pay or performance-based
pay.
ii. Sales representatives: Professionals who work in sales, such as jewelry,
vehicles or luxury items, may receive variable pay as commissions. This can
encourage sales representatives to develop techniques to make more sales,
which can help boost company revenue.
iii. Leadership roles: Employees in leadership roles, such as managers or team
leaders, may receive variable pay because of their senior position. These types
of roles require more responsibility, so it is common to award additional pay to
motivate leaders. They may earn performance-based pay or profit-sharing
variable pay.

5. Incentive plans
Incentive plans are used by companies to keep employees motivated. These plans rely on the power
of incentives to affect employee behavior.
An incentive scheme is a plan to motivate individual or group performance. An incentive scheme
basically involves monetary rewards, i.e., incentive pay but also includes non-monetary rewards.
Incentives are variable rewards granted according to level of achievement of specific results.
Incentives are payment for performance or payment by results. In other words, an incentive plan
must include in its purview the characteristics of time-based and output-based systems of wage
payment.

6. Individual Incentives Plan

This is a most popular form of incentive in the industry under which employees are rewarded
individually for their additional contributions. The individual incentive plans definition is pretty
straightforward. Individual incentives, as the name indicates, are incentives offered to individuals
for making greater contributions to the organization’s goals. The basic purpose of this sort of
incentive scheme is to motivate top performers to keep working well while also motivating other
employees to follow in their footsteps and obtain incentives.

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Individual performance that may be measured in quantitative ways is used to compute incentives
under this system. Everyone gains if you base your individual incentive plans on ideas from your
employees and surveys.

7. Pros of Individual Incentive Plans

i. Inspires Employees: Employees are motivated to accomplish their best through
individual incentives, which encourage them to learn from high performers.
Top performers are rewarded and recognized for their achievements.
ii. Increased Productivity: Employees are encouraged to go above and beyond the
set goal. It contributes to an improvement in productivity. It motivates and
rewards top achievers for their achievements. Work engagement and overall
organizational performance will improve as a result of individual incentive
plans.
iii. Higher Job Satisfaction & Low Staff Turnover: Individual incentives, which
are appropriate for an individualistic culture, assist employees in achieving a
better degree of job satisfaction. They ensure that pay is distributed fairly.
Individuals’ overall organizational abilities will improve as a result of their job
happiness.
iv. Cost Minimization: Individual incentive plans aid in improving performance
of the workforce, resulting in less downtimes and greater output. Increased
productivity aids in the reduction of cost of production.
v. Healthy Competition: Individual incentive plans encourage positive workplace
competitiveness among individuals. They cultivate a culture that prioritizes
sales. An incentive plan gives something for which your workforce may
compete if your company likes a healthy and positive competitive spirit.

8. Cons of Individual Incentive Plans

i. Higher Attrition: Although individual incentive plans have been shown to
boost performance, there have been some doubts raised. Low-performing
employees are discouraged via individual incentive plans. As a result, they may
opt to leave the company, resulting in significant staff turnover.
ii. Lack Of Teamwork: Individual incentive plans motivate employees to achieve
higher levels of performance. As a result, there is a lack of collaboration at the
workstation. Setting performance goals takes work, and having unreasonable
expectations will hinder drive further.
iii. Sacrificed Quality: Employees may be encouraged to enhance productivity and
concentrate solely on volume. It has the potential to lower the product’s quality.
Hence, individual incentive plans such as piece rates may induce employees to
maximize quantity of output while compromising quality if quality control
measures are insufficient.

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 iv. Conflicts: There’s a possibility that individuals’ personal ambitions and
corporate goals would clash, resulting in mistrust between management and
employees. These initiatives, in particular, may mean that the staff are
competing with one another, which might have negative consequences.

9. Group Incentives Plan

In contrast to individual incentive schemes, group incentive plans include incentivizing the entire
group of workers. Each member of the group gets awarded based on the performance of their group
under this arrangement. This technique is extremely beneficial in situations when individual
worker output cannot be quantified but group worker output can be commonly measured. The
emphasis in group incentive plans is mostly on teamwork toward a common goal.
The group incentive plans include a focus on the group meeting a specified level of output and
thereby qualifying for the incentive payment. A team approach is required, with all members
contributing to achieving and maintaining the output. Such collaborative efforts can be rewarded
with group incentive plans based on the piecework or variations thereof, as well as the conventional
hour plan.

10. What is ESOP?

An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers
ownership interest in the company in the form of shares of stock. ESOPs give the sponsoring
company—the selling shareholder—and participants various tax benefits, making them qualified
plans, and are often used by employers as a corporate finance strategy to align the interests of
their employees with those of their shareholders. An employee stock ownership plan (ESOP) is an
employee benefit plan that gives workers ownership interest in the company in the form of shares
of stock. ESOPs encourage employees to give their all as the company’s success translates into
financial rewards. They also help staff to feel more appreciated and better compensated for the
work they do.

11. Benefits of ESOP for Employees

i. Stock Ownership
ii. Dividend income
iii. Buy share at a discount rate

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 12. Performance Appraisal
The term “performance appraisal” refers to the regular review of an employee’s job performance
and overall contribution to a company. Also known as an annual review, performance review or
evaluation, or employee appraisal, a performance appraisal evaluates an employee’s skills,
achievements, and growth, or lack thereof.

13. Objectives of performance appraisal

i. Provide Feedback: Providing feedback is the most common justification for an
organization to have a performance appraisal system.
ii. Rightsizing or Downsizing Decisions.: If promotions are what everybody
wants, layoffs are what everybody wishes to avoid. But when economic realities
force an organization to downsize, performance appraisal helps make sure that
the most talented individuals are retained and to identify poor performers who
effects the productivity of the organization
iii. Encouraging Performance Improvement.: How can anyone improve if he
doesn’t know how he’s doing right now? A good performance appraisal points
out areas where individuals need to improve their performance.
iv. Setting and Measuring Goals.: Goal setting has consistently been
demonstrated as a management process that generates superior performance.
The performance appraisal process is commonly used to make sure that every
member of the organization sets and achieves effective goals.
v. Counselling Poor Performers.: Not everyone meets the organization’s
standards. Performance appraisal forces managers to confront those whose
performance is not meeting the company’s expectations.
vi. Determining Compensation Changes.: This is another classic use of
performance appraisal. Almost every organization believes in pay for
performance.
vii. Encouraging Coaching and Mentoring.: Managers are expected to be good
coaches to their team members and mentors to their proteges. Performance
appraisal identifies the areas where coaching is necessary and encourages
managers to take an active coaching role.
viii. Training and Development: If the performance appraisal procedure includes a
requirement that individual development plans be determined and discussed,
individuals can then make good decisions about the skills and competencies
they need to acquire to make a greater contribution to the company.
14. Process of performance appraisal in HRM
i. Performance standard v. Discuss appraisal with employee
ii. Set up measurable goal vi. Corrective Action
iii. Communicate about performance viii. Feedback

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