Variable Pay: Incentives for Performance

Laurent and Benon

Senior Consultant

Variable pay is compensation linked to individual, team, and/or organization performance. Traditionally also known as incentives, variable pay plans are attempts to tie additional tangible rewards given to employees for performance beyond normal expectations. The philosophical foundation of variable pay rests on

Several basic assumptions:

• Some jobs contribute more to organizational success than others.
• Some people perform better than others.
• Employees who perform better should receive more compensation.
• A portion of some employees’ total compensation should be given to reward above-satisfactory performance.

Contrast the assumptions above with a pay system based on seniority or length of service:

• Time spent each day is the primary measure of short-term contribution.
• In the long term, length of service with the organization is the primary differentiating factor among people.
• Differences in individual contributions to the organization are recognized through different base pay levels.
• Giving additional performance rewards to some people but not others is divisive and hampers employees working together.

Types of Variable Pay

Variable pay plans can be established that focus on individual performance, team or group performance, and on organization-wide performance. An important feature of variable pay plans is that incentives increase the degree of cooperation in teams, whereas individual incentives do not.

Individual incentives are given to reward the effort and performance of individuals.

Some of the most common means of providing individuals variable pay are piece-rate systems, sales commissions, and bonuses.

Organization incentives reward people for the performance of the entire organization.

This approach reduces individual and team competition and assumes that Organization incentives reward people for the performance of the entire organization.

By Priti Shah

Laurent & Benon Management Consultants Ltd, a public limited company with its corporate office Gurgaon with Pan-India presence. We as an organization strive to offer the right Human Resource Solutions at the right time and enable our clients to enhance the net worth of their human resource capital.

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