Have you considered the advantages of a compensation scheme that includes cash bonuses and other forms of variable-pay? This form of performance-based compensation is becoming increasingly popular beyond the traditional use of these schemes in finance, law, IT and other firms, and by one estimate, now used in 90% of American firms. In contrast to traditional merit-pay where employees may develop an entitlement mentality and come to expect annual wage increases not closely tethered to their own individual performance, firms using a variable pay approach distribute additional employee compensation based on an individual employee’s or team’s contribution to the firm’s performance. Because employees working within this compensation scheme understand that a certain percentage of their pay is at risk, variable-pay advocates argue, with a good deal of support, that employees are better incentivized to focus on behaviors that will aid the organization in achieving its desired objectives. In rare cases, the value of a performance-based pay supplement can range up to 300% or more of an employee’s base pay; though for most firms, the average additional compensation comes in at around 10% of base pay. This additional compensation is most often distributed on a monthly or quarterly basis; but in some industries (finance, law, etc.) annual bonuses are the norm. In addition to cash bonuses tied to individual performance, profit-sharing plans and stock options, variable pay also may take the form of additional or stand-alone use of “special recognition” or “spot” awards that reward individual or group achievements with small cash awards, merchandise or travel.

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Of course, depending on the industry and size of the firm and the nature of the “performance” to be measured in particular jobs, the development and administration of these plans can be potentially costly especially if the firm lacks a clear strategic plan with easily- or at least well-defined individual- or team-performance goals and a well-established system of performance review using detailed, performance-based job descriptions. While a 2004 survey concluded that variable-pay plans were beneficial and cost-effective for firms with significant annual growth in revenue, the cost of these plans was found to outweigh their potential benefits for firms achieving only single-digit growth in revenue. However, the cost of these plans is nowhere near as high as many firms and HR managers believe.

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To reinforce a performance culture and be truly effective though, firms must devote the time, money and resources required to provide the appropriate amount of administrative, communication and monetary support for any variable-pay scheme and ensure that the plan comports with applicable EEO requirements. In addition, some experts argue that variable-pay plans are best applied only to those employees, or in some circumstances perhaps whole departments, that actually have both the ability and responsibility to achieve and affect the firm’s performance targets.

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Sources:

 

McClenahen, John S., and Traci Purdum. "Making Variable Pay Pay." Industry Week/IW 253.9 (2004): 72. Academic Search Complete. Web. 12 Apr. 2014.

 

Naughton-Travers, Joseph, and Edith Jardine. "Performance-Based Compensation: What, Who, How." Behavioral Health Management 21.5 (2001): 18. Academic Search Complete. Web. 12 Apr. 2014.

 

Smilko, Jessica, and Kathy Van Neck. "Rewarding Excellence Through Variable Pay." Benefits Quarterly 20.3 (2004): 21-25. Academic Search Complete. Web. 12 Apr. 2014.

 

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