Creating a Variable Pay Plan

Time-Based Plans

Although time-based plans are no longer commonly found, amount of production time is the variable considered in this individual incentive plan. The expected production is stated as a function of the time taken to produce a certain level of output, so the output is expressed as a function of time and not value.

Standard hour

The most common form of time-rate individual incentive is the standard hour plan.

In the standard hour plan, the employee is paid according to output. A standard time is allowed to complete a job and the employee is paid a set amount for the job, if it is completed within that timeframe. Continually failing to meet the standard timeframe would result in examination of either the time standard or the employee’s ability to perform the job.

Example: An auto mechanic is asked to perform an automobile tune-up. The standard time for this task is 2 hours.

If the mechanic completes the task in 1.5 hours, the mechanic is paid for 2 hours. If the job takes 2.5 hours, the mechanic is paid for 2.5 hours, but limits any extra pay that may be earned by taking longer to accomplish the task.

Measured day work

In measured day work, formal production standards are determined for the job, and employee performance is judged relative to those standards.

Evaluation is done at least quarterly, and the employee's pay rate may be adjusted according to how well he or she performs in comparison with the standard.

Sometimes measured day work utilizes a time standard but does not include the incentive feature.

This plan is similar to the pay-for-performance system discussed in DLC Course 77: Pay-for-Performance. The real differences are in the measured day work formality of production standards and the shorter period of performance review. Also, with the measured day work plan, pay rates may go down as well as up.

Measured day work is advantageous where there are numerous non-standardized conditions in the work that make judgment of performance more important.

Discretionary Bonuses

A discretionary bonus is a non-guaranteed bonus, without a predetermined formula, payable after a performance period as determined and approved by management. A discretionary bonus is a form of variable pay where an employer provides cash compensation to an employee for reasons that are not established in advance. Organizations often provide discretionary bonuses at holiday time, at the end of projects, or if the organization achieves unexpected or unusual success.

A discretionary bonus may be a reward for any behavior or outcome deemed important to the organization; it does not have to cover all relevant parts of the job. Examples of discretionary bonuses include recognizing an employee for outstanding work on a special project or if the company attains outstanding financial results.