Variable Pay Compensation

Implementing a Variable Pay Compensation Strategy: What to Beware Of

How do you reward top performers and keep employees loyal during tighter times? In a previous post I suggested a variable pay program as a way to incentivize your employees to stay with the company and help it reach its goals. From profit-sharing to discretionary bonuses, there are a variety of options.

But, as with any approach to pay, you need to think through the outcomes you want and design your compensation strategy so that it supports them. Below I list some tips for success and common pitfalls to avoid when you utilize a variable pay compensation strategy.

Variable Pay – Don’t Forget the Law of Unintended Behaviors

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As you seek to grow your business and keep your top performers engaged and loyal, here are some things to be aware of:

  1. Acknowledge performance. Keep in mind that giving out bonuses to employees who are not performing will be and should be hard to stomach, and will not go over well with your executives. Good variable pay programs ensure that there is a strong performance component to how the money gets allocated. It is also important to make sure that managers are adequately managing any employee performance issues. If you leave any employees out, you must have a defensible reason to do so including non-discriminatory practices.
  2. Communicate with your employees. In order for an employee rewards program to have high success, company performance measures must be achievable and realized by all employees. Each employee must be able to see the targets and understand how they can impact them.
  3. Provide updates. You must have a good communication plan. Employees are going to want to know how things are going on a regular basis. At least quarterly.
  4. Be fair. Acting with integrity from the top to the bottom of the organization. Make sure that checks and balances are in place so that appropriate records are kept and there is good oversight.
  5. Refresh your approach. Don’t forget to change it up every two to three years to avoid the “entitlement” effect that can occur with long-standing bonus programs.

Using a variable pay compensation strategy to recognize organization and employee performance not only can have a positive effect on your employees, but it will also be well received by your executives and shareholders. In my first post, I mentioned a CEO who is burnt out on trying to keep budgets balanced and margins wide. What if you could assure your CEO that the cost of the variable pay is covered since it requires that the organization achieves its stated financial and business goals first? Now that’s a much easier “sell” and your CEO is happy that you are thinking of fresh, cost-concious ways to recognize and reward your high-performing employees. Maybe he or she is thinking that you should get one of those discretionary bonuses.

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John Sporleder
Sporleder Human Capital

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