March 08, 2013
What you should know about variable pay programs

As the economy rebounds, most employers are reviewing their compensation strategy and determining what changes need to be made to retain employees. Variable pay is one component of a post-recession compensation structure that many employers are considering.

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Types of variable pay programs

There are many types of variable pay programs available. Variable pay is compensation that is received in addition to the base pay. "The amount received may be linked to individual, team, division and/or organizational performance." Jennifer Daniels told us in a recent BLR webinar. There are two main variable pay theories:

  • "Incentive pay, which intends to adjust behaviors due to anticipation of variable pay award (which is forward-looking)."
  • "Bonus pay, which reinforces behaviors based on rewarding what has already occurred (looking back)."

Why explore variable pay?

These are some of the reasons you may be interested in exploring variable pay. When executed properly, it can:

  • Reinforce cultural change
  • Align pay with results (to help achieve the goals of the organization)
  • Help to suppresses the entitlement mentality (where employees assume they will get a raise every year, regardless of achievements)
  • Be an opportunity to communicate the organization’s values to employees (through rewarding for the achievement of the goals the organization values)

Questions to ask before implementing a variable pay program

Here are some questions to ask before implementing a variable pay program:

  • Why are you moving to a variable pay plan? Are the employees asking for variable pay? What are the common practices in your particular industry around variable pay? What does senior leadership hope to achieve with variable pay?
  • What are the core objectives of your plan? Are you trying to reward past performance, incentivize future performance, or fill a gap in total compensation levels without adding to fixed costs?
  • Is your organization truly ready for variable pay? "The base pay program should be solid before implementing a variable pay program. It should be working seamlessly. Ideally employees would know what level they’re in and how to move to the next level. And it should be kept up-to-date." Daniels advised.

For more information on implementing a variable pay program, order the webinar recording of "Post-Recession Compensation: Build a Plan That Attracts and Retains Top Talent." To register for a future webinar, visit

Jennifer Daniels is a Senior Consultant with Keating Advisors. She has experience in all aspects of total rewards strategy design and human resources projects implementation consulting. She has a proven track record in project management, conducting detailed compensation analysis, and developing pay-for-performance strategy.

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