Variable Pay: Is There a Difference Between a Bonus and an Incentive?

PayScale’s 2017 Compensation Best Practices Report (CBPR) revealed that nearly three-quarters of organizations give some type of variable pay. At a time when increase budgets are tight, organizations are starting to shift their rewards towards variable pay over fixed costs (salary). Doing so allows them to really shell out the cash for their highest performers … but only if they use the right kinds of variable pay. Is there a difference between a bonus and an incentive? Yep, sure is.

Defining Variable Pay Terms

As an industry, we haven’t really come to agreement on the definitions, but we can typically agree on the concepts. Here’s how I see it:

  • “Variable” pay is the umbrella. Under the umbrella you can find any number of bonuses, incentives, commissions, and other cash compensation that is contingent on something happening. Depending on who you talk to, this could be either potential pay or pay at risk. People differ in whether and how much they are amenable to variable pay, depending on job level, job function, geography, life stage, and a whole host of other factors.

  • “Bonus” falls under the umbrella. Bonuses may or may not be tied to a plan, they may or may not be connected to performance and they are typically backwards in orientation. “Dear employee. You did this thing. This thing worked out well; I liked it. Here’s some money to say thank you.”
  • “Incentive” also falls under the umbrella. Incentives are associated with a specific plan, focused on performance, and future-facing. “Dear employee. I’d like to see you do this thing. If you do, I’ll give you some money. And in fact, if you do even better, I’ll give you even more money.” Because they’re tied to a plan, incentives tend to have better return on the compensation investment.

Choosing Incentives or Bonuses

One of the things we know about variable pay is that it’s variable. Whether you choose to use an incentive program or bonuses will depend on the needs of your specific organization, taking into account your organizational culture, your business goals, and your workforce.

The prevalence of incentives, both individual and team, have significantly increased in the past seven years. In the 2017 CBPR, over 60 percent of organizations gave an individual incentive, and about a quarter of them gave team incentives! Team incentives are increasing in usage as well, which makes sense as we move to flatter more networked and/or agile organizations. Thirty-eight percent of enterprise organizations use team incentives. And while 27 percent of all organizations use a hiring bonus, 39 percent of tech businesses do.

[infogram id=”types_of_bonus_2011_2017″ prefix=”rkd” format=”interactive” title=”Types of Bonus, 2011-2017″]

The moral of the story, then, is to start with your organizational objectives, consider your culture and your workforce, and use the right combination of bonuses and incentives to motivate and engage your employees.

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