Introduction to Variable Pay

euro dollarsYou may have heard some companies that provide its workers with salaries depending on how they performed in the organization. Many employees are enticed by this benefit called "variable pay," which is a type of employee compensation that changes in amount as compared to salary that is paid in equal proportions throughout the year. Variable pay is used by organizations generally to recognize and reward worker contributions that leads to productivity, profitability, team work, safety, quality, or some other metric that is considered as important.

The employee who is awarded with a variable compensation means that he or she has gone beyond the job description to contribute to organization success. It is awarded in a variety of ways, including profit sharing, bonuses, holiday bonus, deferred compensation, cash, as well as goods and services like a company-paid try or a Christmas basket. Payments can also be based on the performance of an individual employee, a certain team or department, or even the whole company.

Advantages and disadvantages

Many employees are enticed by this type of compensation program, as they realize that the company rewards them with a higher pay for a job well done. It also creates a competitive working environment and prevents employees from idling around the office. However, other sectors say that variable pay creates assumptions that money motivates the employees to work harder and that it is possible to fairly measure their work performance.

Proponents of variable pay do not believe that money can be a powerful motivator, saying that a worker’s performance does not change even on a variable pay compensation. However, money can be a motivator for some, especially if they are not passionate about their work. Meanwhile, measuring the performance of an employee is difficult and considered as the most significant problem in the variable pay system. It is because some workers may not be compensated with more benefits due to lack of skills, poor organization, bad strategy, accusations of favoritism among other factors.

The variable pay plan may also be working too well in some instances because it does not consider worker motivation in a realistic fashion. For instance, a building design company implemented a variable pay program to encourage its engineers to draft buildings under budget. In response, one engineer simply scaled a building’s walls and ceilings down by several inches. While the company saved thousands because of the engineer’s idea, and was rewarded with a large amount of cash in the process, he did not necessarily produce the most stable structure.

In order for the variable pay plan to be efficient, an employer must make a commitment to define employee expectations in behavioral and measurable terms. Goals should be achievable, profitable, and practical for both the company and its workers.

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