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August 18, 2011
Compensation Administration: Challenges of Variable Pay Plans

In a BLR webinar entitled "Compensation Plans: How to Build (or Fix) Your Compensation Plan in the Next 90 Days," David Wudyka, SPHR, MBA, BSIE, founder and managing principal of Westminster Associates in Massachusetts, addressed the issue of variable pay challenges.

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Variable pay is here to stay. U.S. employers have spent more on variable pay increases (additional compensation based largely on performance) in the past three years than they have previously. Spending on variable pay as a percentage of payroll will be 11.6 percent this year for salaried exempt workers, according to Aon Hewitt.

Towers Watson found that more companies are differentiating their increases based on performance. In 2010, surveyed employers paid 4.3 percent median merit increases to workers with the highest performance ratings, 2.6 percent to workers with average ratings, and 1.4 percent to workers with below-average ratings.

Variable pay plans have become very common among employers, but they'll continue to prove challenging to implement for many reasons:

  • They sometimes create an expectation in the minds of employees, turning into a fixed compensation expense.
  • During a recession, they don't always motivate employees as strongly as employers expect them to do.
  • It's tough setting performance measures a year or more in a roller-coaster economy, resulting in too many short-term, hard-to-measure, always-changing goals for employees.

The number of employers freezing salaries continues to decline:

  • 32 percent froze salaries in 2009.
  • 12 percent did so in 2010.
  • Only 5 percent are expected to follow suit in 2011.

Almost 80 percent of employers that cut pay within the past 12 months plan to take some type of restorative action in 2011.

David Wudyka, SPHR, MBA, BSIE, is the founder and managing principal of Westminster Associates (www. westminsterassociates.com), a Massachusetts-based human resource and compensation firm that specializes in pay, performance, and productivity issues. He brings more than 30 years of professional Human Resources and compensation experience to the table for clients around the country.

Need help staying on top of critical HR and Compensation issues? See all the webinars BLR has to offer.

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