Creating a Variable Pay Plan

Which employees should participate in incentive plans?

Incentive pay plans may apply to almost all levels of work as long as the organization is willing to commit to the design, expense, communication, and administration necessary to make the program work. From this standpoint, there are few jobs that have not been successfully measured and included in incentive plan programs.

The only requirements. All jobs have an organizational purpose. Better performance of this purpose will help ensure the organization meets its key goals and objectives by increasing revenue, decreasing costs, and ensuring top organizational performance.

Incentive plans require that the organization devise a yardstick to measure this improved performance. The organization can reward the entire organization, division, small group, or individual as long as it can:

• identify measurable work as a yardstick of performance
• set standards on the basis of this yardstick
• measure performance against these standards
• provide variable pay for performance which meet or exceed the standard

An incentive pay plan’s goals should be attainable but also a reasonable stretch for the organization. Base pay is typically paid for performing the required essential responsibilities of the job. Incentive pay plans are used to “incent” attainment of individual, group, division, or organization-wide goals and objectives. If what is measured is related only peripherally to organization goals, and if what is not measured remains undone and neglected by employees, the incentive plan impedes attainment of organization goals.

The Performance Connection

Organizations that have successful variable pay programs are most likely to have invested in appropriate support to ensure the design, administration, communication, and investment is appropriately connected to performance and the business results. If the business instills a performance culture and the variable pay plan is well designed and appropriately implemented, the results will speak for themselves.

The selection of attainable key performance metrics and eligible employees’ ability to influence those goals and objectives is critical to the success of the variable pay plan. It’s important to ensure that the design of the plan sends a consistent message to the plan participants. For example, is the organization rewarding for growth or cost containment?

The purpose of a good bonus program should be to make the organization stronger, more competitive, able to react quickly to change and prosper through growth. A good bonus program draws people into the process. It drives the value of the organization by educating people, not with a formalized training session but through the work they do every day. It provides employees with the support and tools they need to make wise decisions. It provides them with business knowledge they can use to enhance the prospects of the organization as a whole as well as their own professional lives.

An effective variable pay plan will not only “pay for performance” but will complement a high-performance culture and will increase employee engagement.