Every company adopts various means to increase productivity levels. These methods can range from varied areas such as training, feedback and remuneration. One such method is the variable pay plan which gives extra credit to the individuals who outshine others and thus, recognizes their outstanding performance. Since it is directly linked to the performance of an employee, it is also known as the “at risk” method. Unlike salary, incentives or benefits under the variable pay plan are not paid on a regular basis. It can even be cancelled in case an employee fails to meet the targets or objectives, thus, helping the company as a whole to achieve its goals in an efficient manner.
There are various forms in which a company may implement this plan in various ways. Team incentives, share in the company’s profits and individual incentives are some of the well known ones for doing so. This plan requires employees to have a clear understanding of the goals set for them and thus realizing the importance of their work towards achieving the company’s goals. Hence, for this method to be effective, it should be successful in creating a peer-pressure on the employees so that they get motivated to work for the company.
There are some precautionary measures to be taken before implementing this plan. These include the creation of a standard and uniform metrics that would help review an employee’s performance, making sure that managers are not biased towards subordinates, clearly communicating the quantum and quality of work expected from the employees, and setting up practically achievable goals.
Four of the most widely used variable pay plans are piece rate wages, bonuses, profit sharing and gain sharing. Piece rate pay plans work on the principle of paying a fixed sum for each unit of production completed by an employee. Bonuses are paid to both employees and executives depending on certain conditions and also on certain occasions. Profit sharing plans are ones that spread throughout the organization and distribute the compensation based on a certain established formula. Gain sharing pays employees in groups and is based on some formula that allocates incentives based on improvement in productivity from one period to another.
Thus a variable pay plan, if combined effectively with the business strategy can result in great results for the company.
There are various forms in which a company may implement this plan in various ways. Team incentives, share in the company’s profits and individual incentives are some of the well known ones for doing so. This plan requires employees to have a clear understanding of the goals set for them and thus realizing the importance of their work towards achieving the company’s goals. Hence, for this method to be effective, it should be successful in creating a peer-pressure on the employees so that they get motivated to work for the company.
There are some precautionary measures to be taken before implementing this plan. These include the creation of a standard and uniform metrics that would help review an employee’s performance, making sure that managers are not biased towards subordinates, clearly communicating the quantum and quality of work expected from the employees, and setting up practically achievable goals.
Four of the most widely used variable pay plans are piece rate wages, bonuses, profit sharing and gain sharing. Piece rate pay plans work on the principle of paying a fixed sum for each unit of production completed by an employee. Bonuses are paid to both employees and executives depending on certain conditions and also on certain occasions. Profit sharing plans are ones that spread throughout the organization and distribute the compensation based on a certain established formula. Gain sharing pays employees in groups and is based on some formula that allocates incentives based on improvement in productivity from one period to another.
Thus a variable pay plan, if combined effectively with the business strategy can result in great results for the company.
Written By: Anubhav Jain, IIM Indore
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