Answer
A primary benefit of variable pay programs for employers is they provide flexibility and allow an organization to reward employees through profit gain rather than operational expenses. Within a profit-sharing plan, for example, a company earmarks a percentage of additional compensation based on its profits. They may be distributed to the entire company or provided to a line of business or region that exceeds revenue goals. The percent value may be different for executive management than other team members.
A second advantage is that employees learn how their work affects the company’s performance and understand how they can impact its profitability.
Variable pay programs help an organization to:
- Control costs.
- Enhance motivation and boost productivity of employees.
- Emphasize the use of metrics to track performance.
- Encourage managers to define success and communicate that to team members.
- Increase the likelihood of reaching goals and objectives.
- Attract and retain valuable employees.
- Make employees feel more valued.
- Engage and retain key employees.
While variable pay plans can vary (pun intended!) from one organization or business sector to another, there are five elements critical for effectiveness:
Clear – Plans should be clear to all employees in accordance with an organization’s compensation philosophy.
Presentable – An organization benefits when plans are communicated openly and documented for reference.
Controllable – Employees must have authority and control over the activities and outcomes for which they are being evaluated.
Metric-based – Performance must be measurable, able to be reported regularly, and relevant to the organization and its overall objectives. Metrics may involve company profitability goals or initiatives that improve the company culture.
Tiered – Potential compensation may differ between executive management and other team members in order for managers to assume additional roles and dedicate the extra effort to motivate their teams.
