Creating a Variable Pay Plan

INTRODUCTION

Variable pay has produced more change in global compensation plan design than any other form of compensation with well over 80 percent of companies now using some form of variable pay. The roots of variable pay began in the early 1980s when organizations began searching for optimal levels of performance and productivity. High-performing organizations started questioning traditional “one size fits all” pay practices and implemented more flexible and responsive pay strategies that could influence improvements in business results and the quality and quantity of work output without adding to fixed costs.

Fixed Pay represents a permanent cost to an organization and will not typically vary based upon business financial or non-financial results. Base salary is an example of fixed pay. In order for an employee to earn more, the employee must be paid for working longer hours or receive a base salary increase such as being recognized for a merit or promotional increase.

Variable Pay, on the other hand, is not a fixed cost. It generates rewards based on factors determined by an organization ranging from the individual's performance, attainment of goals and objectives, and/or the financial and non-financial results of an organization. Variable pay rewards employees for performance that contributes to organizational success while it controls labor costs when the organization is less successful. Variable pay is “pay at risk” and is not a permanent cost to the organization. For the purpose of this course, variable pay plans include the following:

• Incentive Plans
  • Short-Term Incentive Plans
    • Individual Performance-Based Plans
    • Team/Small Group Incentive Plans
    • Large Group Incentive Plans
    • Profit-Sharing Plans
  • Long-Term Incentive Plans
    • Equity
    • Cash

• Bonus Plans
  • Hiring Bonuses
  • Project Bonuses
  • Referral Bonuses
  • Retention Bonuses

• Recognition Plans
  • Spot Cash Awards
  • Managerial Recognition
  • Nominations
  • Organization-Wide Recognition

Overview

This course will concentrate on the design, development, and administration of Short-Term Incentive Plans. First, we will look at why variable pay plans are used. Then we will review which organizations and which employees are best suited to these plans. After this, we will examine the methodologies of each type of variable pay plan. We will provide an overview on how to design, communicate, and administer these types of plans. Finally, you will use ERI Economic Research Institute’s Salary Assessor to determine the amount of pay to target for variable pay.