Creating a Variable Pay Plan

Is your organization ready for a variable pay plan?

There are many factors which will influence the decision to implement a variable pay plan. Some of these factors include:

• Business life cycle
• Business culture
• Business strategy
• Management support
• Business goals and objectives
• Competitiveness in the labor market
• Costs of plan
• Business risk versus reward
• Available resources
• Legal environment

In addition to the business life cycle, a business that promotes a culture that supports its employees and empowers employees and teams to affect organizational performance is an excellent fit for a variable pay plan. An organization that places a lower value on its employees but empowers individuals to affect organizational performance may be a good fit for individual incentive plans. Be cautious of business cultures where employee value is low, and employees do not have the ability to influence organizational performance.

A business strategy which includes top management support of variable compensation is an important component of a plan’s success. Without top management support, a plan will fail.

The business goals and objectives should be measurable to support a variable pay plan.

Prior to implementing a variable pay plan, it is important to determine how the organization members are paid in relation to the competitive marketplace. Also, are short-term incentives common practice in your industry and external labor market?

What are the plan costs? Does your organization have the ability to pay for the plan? An ideal plan design will pay for itself through attainment of key plan objectives. If your business is paying at market at present, will fixed compensation be reduced to pay for the plan? Will the plan be paid in lieu of base salary adjustments? What are the implementation costs, including administrative staff, systems, compliance, and communication?

Are the organizational rewards sufficient to offset any business risk for the implementation of the plan? All plan targets should be designed to be attainable. What if the plan does not attain target? Do eligible employees trust the top management team and organization in the event plan targets are not attained? What if the plan paid at maximum payout? A new plan should have sufficient controls in place to protect the organization from substantial over payment due to unexpected windfalls and business conditions.

Does the organization have the necessary resources available within it to design, implement, and administer a variable pay plan? Will the plan require additional systems support?

Has the plan been reviewed for tax and wage and hour legal compliance in key locations where eligible employees are employed?