Variable Pay: A motivation & retention tool

variable pay

Payroll, Performance Management

Over the last couple of years, it has become clear that the option of variable incentives did not work very well since most employees wanted the security of a high base pay and meeting targets was largely unpredictable. The economy is on an up-swing again and employers and employees see new opportunities for increasing incomes.

Organizations want to curtail their fixed costs, hence salaries may not increase dramatically and immediately, but variable incentive plans will help retain high-performers and encourage achievement.

As soon as we think of variable pay incentives, most of us immediately picture the sales department. But in my recent research I have found that each employee, irrespective of their department can be included in a company’s variable incentive plan. The next part of this blog explores the various categories of incentives that can be applied to employees in different job roles and how HR can use this tool to motivate and retain employees across the entire company.

Typically, each employee may get 5 – 10 different goals which determine their variable incentive plan for the year (or in some cases, even a month, quarter or half-an-year). Senior employees and those in management positions would have significantly higher goals that may be linked with the overall performance of the company or with their respective departments. For middle management positions, the targets would be based more on team performance and for junior employees, the variable incentives will focus on individual achievements.

By giving multiple targets to each employee, there is a greater opportunity for earning at least some part of the Variable Pay Incentives. This can act as a strong performance motivator and retention tool. It also enables identification of high performers who become eligible to enter the succession pipelines for key positions.

Types of variable pay incentives

Variable incentives can be broken down into multiple categories, some of which are:

Performance-Based targets

Each department in the company can have specific performance related goals such as:

  • Company Top Line and Bottom Line (Revenues and Profitability): Can apply to all employees, though with varying weights.
  • Departmental goals can apply to employees of specific departments. For instance, if there are employees from 2 different product lines, each of them may have different revenue and profitability targets.

Time based

Most companies want their employees to start work on time, take minimum leave, attend regularly and manage their time effectively. This can be encouraged by adding the following parameters to their incentive plans:

  • Billable hours
  • On-time entry
  • Average weekly hours worked
  • Training hours undertaken etc

Evaluation and recognition

While appraisal and goal sheet achievement could be counted as individual targets, typically these are measured at a team level and we may see score adjustments based on normalization, relative ranking etc. Hence, these are under a separate category of evaluation and recognition. Some of the targets in this category are:

  • Appraisal score
  • Goal sheet achievement score
  • Client Recognition(s)
  • Nominations for rewards
  • External events conducted etc

Individual targets

These are largely based on individual achievements and would constitute 0 – 20% for senior level employees and 40 – 80% for junior employees. Some individual targets may include:

  • Individual sales performance
  • Production performance (such as number of pieces manufactured)
  • Project renewals
  • Number of hires (for recruitment department)
  • Training imparted (for training department) and so on

Negative indicators

To help avoid negative behavior, some companies include targets which have a negative impact on the variable incentives. Some of these could include:

  • Leave without pay
  • Late entry
  • Non-completion of assigned targets
  • Disciplinary incidents etc

Key challenges in implementing variable incentive plan

There are multiple challenges that organizations typically face when implementing a variable pay incentive plan, such as:

  1. Communication of the plan to employees
  2. Collection of data which can help in calculation of achievements
  3. Calculation of variable incentives for a large population of employees
  4. Integration of variable incentives payout with the payroll software in a timely manner
  5. Communication of payout to employees in a transparent manner

We have seen HR managers spend significant hours in managing the data collection, calculations and in communication processes. Because of the effort involved, most companies design plans with a minimum possible set of employees that are absolutely required for variable incentive planning.

How Empxtrack can help

Empxtrack is integrated HR software that combines all aspects of an employee’s lifecycle in an easy-to-use browser-based application. It integrates Goal Setting and Tracking, Appraisals, Training, Self Services, HCM, Recruitment, Rewards and Recognitions or other achievement related targets such as those explained above. All these can be automatically captured or imported in Empxtrack and can be linked to Compensation management and Payroll Software.

Empxtrack captures all these details and over 1500 different parameters and helps companies manage the most complex variable incentive plans using its Pay for performance module. HR managers can, in addition, get reports on impact evaluation, scenario analysis and final payout – all in a matter of minutes.

To help design a variable incentives plan for your employees or to enable an existing plan on web-based software, please Contact Us with details of your requirements.

TAGS: Employee Productivity, HR Software, HR Technology, Motivation, Payroll, Performance Management

23 thoughts on “Variable Pay: A motivation & retention tool”

  1. When I started to go through first sentences of post i didn’t think that it can be useful facts for my situation however now I am very greatful that I found this place to learn. Thanks to the writer.

  2. In my opinion what is most critical is matching the employers objectives with the incentive of the employee = alignment = win – win for both parties.

    Oli Hille

  3. An incentive plan when we design more important it come to the mind of sales team how much they can maximum earn but HR has to visualise scope is unlimited to a smart sales man. This is the base of incentive.

  4. Compensation Planning enables complete planning and management of all types of compensation programs including salary, merit increases, market adjustments, lump sum payments & other discretionary pay components.

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  8. A very valid point Tushar. In distressed economies, retaining talent and compensating well is difficult. Variable Incentives to a some extent can address the issue.

    Apart from creating a great plan and managing it well, one challenge that consistently surface up is the “mindset” of employees and their perception about their salaries.

    I hope when integrated with Goal Setting and Performance Management System, Variable Pay can drive better results for organizations – by retaining a couple of people for a couple more years.

  9. I found this post while surfing the net downloads. Thanks for sharing will be sure to follow this blog regularly and will email this post to my buddies.


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