variable pay

The term variable pay refers to the additional payment that the employee gets from the company for meeting a specific target or giving an exceptional performance. It is usually given on a quarterly, half-yearly or yearly basis. Some organisations also call it performance-linked pay. 

With the help of strategically using variable pay, the organisation can motivate and engage the employees for improved work performance and enhanced retention. Organisations use it as a goal-setting method, based on which the variable pay of any employee is made. 

Reasons for offering variable pay

Base salary can be reduced: By offering a lower base salary and using variable pay for expected performances, employers can save money 

Generates accountability: increases ownership of the employees and develops a sense of responsibility. 

Gives a framework for to work process: It gives a systematic framework for the process that an employee will have to follow. 

Accelerates teamwork: With the help of setting the expectation boundaries and paying accordingly, the team will develop collaboration to meet the expectations. 

The best way to appreciate and recognise: This is one of the best ways the employer can appreciate the employee for their exceptional work

Clarifies expectations: This also helps in clarifying the expectations that the company has for the employees.

Types of variable pay

Individual incentives: It depends upon the work done by an individual employee. In this type the employer sets a particular expectation for the employee and at the time when the employee meets it, they get an incentive accordingly. 

Examples: 

• Sales commission
• Safety awards
• Bonuses 
• Special recognition 
• Attendance bonus

Group incentives: The team variable pay is an equalised system of awarding the team on a particular win. This encourages teamwork and develops positive team behaviour. It minimises the work burden on individuals and accelerates measuring overall team performance.

Examples: 

• Gain Sharing
• Quality management 
• Labor cost deductions 

Organisational incentives: it is a distribution of a company’s profit to accelerate morel, productivity and work performance in the company. It helps companies in accelerating long-term growth and higher employee engagement.

Examples:

• Employee stock option
• Deferred Compensation
• Profit sharing 

Calculating variable pay in salary

An employee receives the variable pay after a certain time of receiving a salary. To calculate variable pay from the package here is a specific calculator:

Package= fixed pay variable pay 

5 Steps for Creating Variable Pay

Step 1:  Pay attention to the resources and organisational culture

Step 2: create understandable variable pay planning 

Step 3: Update a plan regularly as per the needs and expectations of the company

Step 4: Connect the variable pay with the employee performance 

Step 5: Make an inclusive variable pay 

Eligibility criteria for variable pay