Creating a Variable Pay Plan

Rise of Variable Pay

Why has business embraced the idea of variable or incentive, pay? There are a number of reasons.

Reason #1: The Economy

Salaries are very challenging to decrease. When an organization faces hard times, it is difficult or nearly impossible to lower the salaries of current employees so, with salaries being a fixed cost, it may become necessary to eliminate jobs. This has been a way of life for businesses for decades. Variable pay can make it less necessary to lay off employees. An effectively designed incentive plan will lower labor costs during business downturns. It will also pay at plan or over plan during prosperous times. Labor costs become more flexible: higher when the organization is producing more and lower when the organization is less successful. It is an excellent fit for today’s economy.

Reason #2: Productivity

Accomplishing more with fewer people makes incentive pay attractive to business. Incentive programs can encourage employees to work smarter, faster, or longer. One study by the Consortium for Alternative Reward Strategies reviewed 663 incentive plans and found a median net return of 134% on incentives - for every incentive dollar spent, there was a gain of $2.34.

Reason #3: Loyalty

Organizations generally wish to tie the employee to two things:

1. improved job performance
2. improved organizational performance

A well-designed plan will engage employees to participate in the success of the organization.

Reason #4: Market-Competitiveness

Since variable compensation is now used by over three quarters of all companies, a market-competitive compensation package will typically include some form of variable pay. Salary surveys typically report average annual bonuses and incentives, in addition to market base pay. Some report long-term compensation as well.