Variable Pay Systems

Professor Geoff White

Senior Adviser UCEA
Forms of Variable Pay

• Pay progression systems – IPRP, competence-related,

skills-based, market based. Progression through the pay
grade varies according to individual measures – as
opposed to guaranteed service-related progression for all.
• Variable incentives – individual bonuses, team based
bonuses, enterprise-wide schemes (e.g. gainsharing, profit
sharing, share ownership schemes).
• Individualised flexible or ‘cafeteria’ benefits.
Pros and cons of variable pay

• Enables reward cost to be focused on those seen as 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).
Pros and Cons of Variable Pay

• Difficult to operate in certain environments (e.g. strong

egalitarian cultures).
• Difficult to measure contribution in some sectors or
occupations – easier to measure outputs than behaviour.
• Can create unpredictability in pay costs.
• Can demotivate staff except high flyers.
• No evidence that poor performers improve as a result.
• Some ethical issues about transfer of risk from
organisation to individual employees.
The ‘New Pay’

• US ‘new pay’ literature (e.g. Lawler, Schuster and

Zingheim) has been pushing the variable pay agenda for
several decades.
• ‘New pay’ argues against formal job structures (especially
job evaluation) in favour of less structured systems (e.g.
broad bands).
• Argues for the proportion of guaranteed pay to be reduced
and the ‘at risk’ element increased.
The New Pay

• Argues for pay to be based on various measures

of performance – individual, team and enterprise
level.
• Some evidence that UK has been moving
towards new pay model (more individual pay
progression systems and financial participation
in enterprise performance) but no evidence of
move away from JE (actually increasing).
Individual Bonuses

• Research shows growth in use of individual

bonuses. Impact of ‘city bonuses’ on the AEI.
• Performance bonuses can be more effective
than contribution based progression – have to
re-earned each year; clearer ‘line of sight’
between performance and reward; easier to
control costs.
Team Bonuses

• Often seen as a ‘softer’ approach to managing

performance – less likely for unions to oppose because
‘collective’.
• Majority of team bonuses in finance and retail range from
5-10% of annual salary (Armstrong).
• Team based pay often seen as an alternative where
individual contribution hard to measure.
• But often run in conjunction with individual and enterprise
level rewards ( ‘New Pay’ concept).
• Best used for permanent teams but can also be used for
temporary project teams.
Pros and cons

Advantages Disadvantages
• Whole team understand and • Won’t work unless clearly defined
share in success. and stable work groups.
• Can strengthen moves to team • Less effective members can
working and peer pressure to ‘freeload’.
perform. • Peer pressure can disrupt
• Emphasis on working together workplace relationships.
(rather than competing for • High performers may be
rewards). frustrated at the absence of
• Can be used to reward individual recognition.
behaviours (e.g. customer care) • Can become over-complex in
as well as ‘hard’ performance terms of measures.
outputs. • Performance targets may not be
• Sometimes more acceptable to within the power of team.
staff than individual rewards.
Civil service experience

• Makinson ‘Incentives for Change’ report for Treasury argued that

individual performance related pay not suitable for many civil
service roles.
• Advocated a team-based reward approach.
• Experiment in Jobcentre Plus from April 2002 – March 2003. Five
targets set.
• Evaluation by Bristol University found that the scheme had an
effect on quantity of work but not on quality.
• Team size needs to be small and not dispersed over many sites.
• The connection between effort and output needs to be clear and
measurable.
• However, not pursued in the civil service.
Team pay works best where…

• Teams can easily be delineated.

• Teams are relatively small and concentrated geographically.
• Team working is already well established as a form of labour
organisation.
• Self-managed teams have a high degree of control over their own
work and can affect outcomes.
• Jobs tend to be similar and interchangeable (and often lower
level tasks). Not so suitable for higher level jobs?
• Where there is a culture of co-operation and sharing of
knowledge.
Team pay in HE – introduced or
planned (UCEA FA Surveys)

• University of Leicester • University of Central

• University of Exeter Lancashire
• Royal Academy of Music • University of Sunderland
• University of Hertfordshire • University of Staffordshire
• University of Surrey • Leeds Metropolitan University
• University of Southampton • Birkbeck College, London
• University of Leeds • University of Sussex.
• University of Loughborough
Institution-wide Bonuses: HE
Example (draft)

• Each year Board of Governors will assess institutional

performance in respect of targets set previous year.
• All members of staff will be eligible (except those already
identified as poor performers).
• Amount of bonus fund will reflect the institution’s performance as
measured by key performance indicators (KPIs) based on
university’s strategic plan.
• If KPIs not met, no bonus payable (even if individual performance
exceeds targets).
• Board will decide the proportion of the bonus fund to be allocated
to institution-wide bonus and individual bonuses.
Questions

• Do all staff have the same level of control over outcomes

(e.g. student recruitment? financial surplus? NSS?
teaching and research quality)?
• Or do some teams have more significance for results than
others? Horses for courses?
• Are team bonuses more appropriate to certain levels of
staff than others (e.g. support/academic; junior/senior?)
• Should there be both team bonuses and an institution level
bonus?
• If so, what should be the link between these?