Performance-dependent remuneration – that is the shortest definition of variable pay. The performance involved may be that of individual contributors, teams, departments or entire organizations. It may be short term or long term. One option is to pay bonuses to individual employees for realising quantitatively defined KPIs. Or one may introduce a profit sharing scheme, or any of a whole number of alternatives. Whether a variable pay scheme will work or not, and if so, how it should be set up, depends on the organization’s remuneration philosophy and culture.
Many companies introduce variable pay in combination with a fixed salary element because they think it will motivate their employees and make them perform better. And yet there is little scientific proof for this assumption. What has become clear, though, is that variable pay influences behaviour. Setting targets and paying bonuses for their achievement will make employees spend more time on those targets. And another advantage of variable pay is that its costs ebb and flow with the organization’s financial results. That sounds good. And indeed, it can be. But it may also work against you. If a sales person is rewarded for the turnover they generate, and they do so by pushing mostly easily sold products, this may conflict with the company’s sales strategy. So one must really think the consequences of variable pay through before introducing it. This includes the targets to be set. These must be realistic, to begin with. Otherwise they, too, will work against you.
And there is more. The market conformity of the whole of the compensation and benefits offered, for instance, including variable pay. To what, exactly, do fixed and variable pay add up? And what if all employees achieve their objectives? Can the organization still pay what it has promised? And can it still do so in five or ten years? Or should these bonuses be capped? Also, how does a scheme like this work legally? Must the works council agree? How does one communicate about it with the employees? All in all, variable pay really isn’t so simple. It takes much preparation, expertise and attention. BexerHamstra consultants know the ins and outs of variable pay like no other and they can help clients from start to finish.