What is Variable Pay ?

The problem of productivity and employee is a prime concern of companies. Variable pay which is otherwise known as “pay-for-performance is popular in the corporate world of today. By ensuring that two employees with different efficiency do not get the same remuneration, the company rewards productivity and hard work and nudges non-performers to work harder.

Some of the factors that have made company to consider variable pay systems are:- 
- Traditional salary systems do not efficiently differentiate performance with remuneration 
- Employees will have a greater incentive to work harder if they are able to see immediate tangible rewards. 
- Non-performers and underperformers will be motivated to work harder.

There are many different types of variable pay systems being followed. Some of them are individual incentive plans, achievement awards, lump sum cash handouts, sharing gains, etc. The central theme of all programs is to reward innovation and achievement and discourage mediocrity in performance.

It is important to understand though that variable pay does not include severance pay, overtime, one time bonus, etc. Variable pay is calculated on many fronts. The productivity can be measured at the level of the individual, at the level of the team or at the department level.

Variable pay programs are not without their critics who point that in many cases a variable pay program was simply a profit sharing programs in disguise.

For a variable program to be effective, the following factors need to be taken care of : 

1. Control of the employees over their own performance: If the employees’ performance is dependant on the output of other employees, they may not be enthusiastic about the variable pay as their salary is now tied not to their own performance but to others as well. 

2. Transparency: Employees must be able to see the difference in pay and relate to the difference in payment. If they feel their performance is not valued or if the see what they perceive to be non-performers being rewarded, they lose faith in the integrity of the system 

3. Measurement of Goals: Business goals must be set and be transparently measured. If the employee is not convinced of the transparency, he may loose faith in the system. The measuring process should inspire confidence in the employees. The achievements and related feed back should be conveyed to the employees during regular meetings. The employees should also be given the opportunity to voice their opinions and objections. The helps in building trust in the system. 

4. Alignment of goals with the company’s long term objectives: It needs to be ensured that the goals for which employees are rewarded are aligned with the objectives and long term strategy of the company.

Variable pay has certain disadvantages as well. It can cause strife among employers and breed jealousy and resentment. Hence, it is important that the evaluation process which determines the variable pay is kept transparent and easily understandable.