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Rosley C& B

Variable pay refers to compensation that varies based on performance and may include bonuses, commissions, and incentives. It aims to reward employees for achieving goals. There are short-term variable pay plans lasting one year or less and long-term plans lasting two or more years. When designing variable pay plans, companies should consider effectiveness of current plans, employee feedback, budget, and best practices. Challenges include setting performance measures, communicating the plan, distributing payouts from limited budgets, and measuring plan effectiveness. Variable pay can motivate employees but also transfers risk from the organization to individuals.

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Rogil Jacob Daniel
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57 views

Rosley C& B

Variable pay refers to compensation that varies based on performance and may include bonuses, commissions, and incentives. It aims to reward employees for achieving goals. There are short-term variable pay plans lasting one year or less and long-term plans lasting two or more years. When designing variable pay plans, companies should consider effectiveness of current plans, employee feedback, budget, and best practices. Challenges include setting performance measures, communicating the plan, distributing payouts from limited budgets, and measuring plan effectiveness. Variable pay can motivate employees but also transfers risk from the organization to individuals.

Uploaded by

Rogil Jacob Daniel
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Rosley Dsouza Roll No.

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What is variable pay?


Variable pay is defined as direct compensation that does not become a

permanent part of base pay/salary and which may vary in amount from period to period. Other names for variable pay include: incentive compensation, incentives, bonuses, commissions, cash awards and lump sums.
This system largely implies a pattern where the employer divides an

employees salary into two partsfixed and variable, whereby the fixed part of the salary is credited to an employee every month and the variable aspect follows as per the goals and targets achieved.

Categories of Variable Pay Plans

What are the key elements to consider when designing a variable pay plan?
1. Assessing the effectiveness of any current variable pay plan(s) to identify gap areas that need to be addressed in the new plan. 2. Analyzing any previous employee feedback on variable pay plans that has been captured. This also ensures that employee inputs have been considered while developing the new plan. 3. Evaluating the best practices and provisions pertaining to the 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 the various programs (current and new).

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.

What is the difference between short and long term variable pay plans?
Short Term Variable Pay
This comprises of incentives payable on achievement of preset individual performance targets which are measured over a time period of one year.

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

Long Term Variable Pay

Variable Pay that is paid out to an employee by measuring performance 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 term variable pay is also often used as a retention tool or even as a retirement benefit when it consists of deferred shares.

Types Of Plans For Variable Pay


Individual-based plans

Individual-based plans are the most widely used pay-forperformance plans in industry.
Merit pay consists of an increase in base pay, normally given once a year. Supervisors ratings of employee performance are typically used to determine the amount of merit pay granted. Once a merit pay increase is given to an employee, it remains a part of that employees base salary for the rest of his or her tenure with the firm.

Team-based pay plans

Team-based pay plans normally 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 or narrow. Less commonly done in individual-based programs, payments to team members may be made in the form of a cash bonus or in the form of noncash awards such as trips, time off, or luxury items.

Plantwide or company-wide pay-for-

performance plans

Plantwide or company-wide pay-for-performance plans reward all workers in a plant or business unit on the basis of the performance of the entire plant or business unit.
Most corporations have multiple plants or units, a factor that makes it difficult to attribute financial gains or losses to any single segment of the business. The performance indicator most frequently used to distribute rewards at the plant level is plant or business unit efficiency, which is normally measured in terms of labor or material cost savings compared to an earlier period or another plant or business unit.

What are some challenges associated in implementing variable pay?

Setting the right performance measures

The organization needs to identify and apply the correct set of performance parameters which ensure that there is a line of sight that the employees have pertaining to the linkage between their individual goals and the business objectives.

Plan Communication

Sharing the plan and its features with the employees in a proper manner is a challenging exercise. Another associated challenge is important to ensure that the fairness and objectivity of the plan is communicated in the correct manner.

Budget Distribution and Payout Calculations

While variable pay plans primarily reward performance, driving retention and engagement are also important objectives of some plans. Hence distribution of payouts based on the varied purposes that a plan might have, from a limited budget in order to suitably reward high potential talent is challenging.

Measuring plan effectiveness

From a financial perspective it is typically easier to measure plan effectiveness since employee performance is linked to business returns. It is also important to work out the effectiveness of the plan in terms of its value to the employee.

Pros and Cons of variable pay


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

the organisation. Enables pay cost to be more easily varied according to circumstances. Can help to shape employee behaviours to meet organisational objectives (change management) Little evidence that contribution-based pay systems enhance motivation (staff surveys). But such schemes have been found to be associated with improvements in 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.

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