Nonprofit Variable Pay

Types of Reward Structures

Variable pay plans tend to fall into one of three types:

• Add-on pay. An add-on variable pay plan develops a competitive base pay position and then shares added gains when the performance measure is exceeded.
• At-risk pay. In this form of variable pay, there is a guaranteed base pay which is typically market competitive. The variable pay is also commonly set at a market competitive position, but, in this case, is at risk in the event the desired threshold (minimum) performance targets are not attained.
• Base pay at risk. This tends to be used for direct sales employees. This alternative suggests that the line between base pay and at-risk pay can be moved until a very large percentage of the employee's pay is at risk. Any employee who is paid entirely on the basis of a set amount for some measure of performance (such as the amount of revenue attained) really has no base pay, only variable pay. How much this person makes depends on the employee's sales results over a targeted performance period

For a reward to be of value to a person, that person must perceive the reward as significant enough to expend effort. Employees don't usually expend effort on a reward that yields a small proportion of the employee's earnings or a plan in which the probability of attaining the reward is low. Thus, it is unlikely that the organization will attain the performance it desires. But there may be an exception: bonus plans that reward a very specific behavior that is an out-of-the-ordinary outcome of the job.

Performance-reward ratio

Basic to the performance-reward connection is the ratio of reward to performance. This ratio can take a number of forms:

• The most common is the straight-proportional ratio. This type provides a consistent proportion between performance and reward.
• A second possibility is the geared ratio. In this case, the ratio of reward to performance units varies at different levels of production. The proportional change may be less or more than the proportional change in outcome. What is common in this type of plan is that there is a base rate of performance and variable reward after a level of performance has been achieved.
• In a progressive ratio, the reward increases with higher levels of performance. This type of variable pay is most likely to be useful where higher levels of performance become increasingly difficult to achieve.
• A regressive ratio is the opposite: higher levels of performance lead to a less proportionate reward. This may be appropriate where higher levels require the help of others in the organization to achieve them.
• The final ratio is not really a ratio, but an all or nothing plan where a fixed reward is granted if a standard is exceeded. This arrangement is often found in a fixed bonus system.