Benefits and Compensation

Trends in the Use of Variable Pay

“Variable pay supports the organization’s strategic direction and drives the accomplishment of organizational goals.” Teri Morning explained in a recent BLR webinar. “It does so by enabling companies to recognize and reward high performers and to sustain high performance.”

What Is Variable Pay?

Variable pay is pay given over and above base pay, since average performance is already compensated for in the base pay at the market rate. “Its goal is to align the focus of the employee with enterprise-wide goals.” Morning explained. In fact, it is often directly tied to performance and meeting specific individual goals—which is where the alignment with organizational goals comes in. This pay rewards outcomes – not good tries.

As such, variable pay should pay for itself—it is not paid out unless specific performance goals are met.

“Variable pay, in a way, does not only reward your high performers, it gives them a line to go for. High performers like to know where the line is so they can jump it. Variable pay and scrutiny and performance goals tend to dissuade the poor performer from hanging around.” Morning explained.

That said, employers should also remember that the use of variable pay does not negate the need to compete in the market with base pay for good employees.

Variable Pay Trends

Right now there is a trend toward more variable pay and other types of pay-for-performance. In reality, most employers have been trying to do both – give raises by merit, but also pay for performance. Instead of putting fixed pay increases into place, organizations are looking for less expensive, less permanent solutions, such as lump sum payments, bonuses or just paying top performers. In fact, employers are no longer averse to withholding merit increases for poor performers so they can afford to grant meaningful increases to better performers.

Additionally, short-term incentives (a year or less; usually weekly or monthly) are increasing as part of the rewards package. You can pay incentives closer to the event, and end up paying a smaller amount but get more return.

Promotional budgets are also becoming separated from the salary budget. One in three companies from a World at Work survey are now, as standard practice, adopting the use of separate budgets for promotions.

For more information on variable pay and how employers are using it, order the webinar recording of “Pay Grades and Job Value: How to Correctly Assemble All the Pieces of the Compensation Puzzle.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Teri Morning, MBA, MS, SPHR, SPHR-CA, is the president of her own HR consulting firm. She has over 15 years human resource and training experience in a variety of professional fields, including retail, distribution, architectural, engineering, consulting, manufacturing (union), public sector and both profit and non-profit company structures.