Five Solid Tips to Make Variable Pay Work
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Five Solid Tips to Make Variable Pay Work

by Ashok Grover

Do you find it difficult retaining performers? Are you skeptical about this variable pay thing? Does it work? Will it increase or reduce your wage bill? Here are answers to all your doubts!


Variable pay is becoming an in-thing. While the primary reason should be to link it with performance with focus on performance improvement, there may be some other - at back of the mind - factors. Many companies think that it is a more comfortable option since the variable portion would be decided on year-to-year basis leaving the option to cut it down in adverse business conditions. Thus, an increased wage bill would not be a permanent liability like traditional increments which are added straight to the salary packages.

While this may not be wrong, it is not entirely true either. What is the ground reality? You need to consider the following points to see how really does it affect a company and its employees:

  1. Variable pay must be linked to performance - truly. Even though it is always stated like that, most of the times, either it is not done at all, or the performance criteria are so subjective that it does not mean anything.
  2. It may not be possible to eliminate subjectivity altogether. This fact should not dilute your objective. All efforts must be made to reduce subjectivity as much as possible. Be fair and make sure that you are also perceived to be so.
  3. Even with good positive minded people and performers, the issue of role clarity may spoil the game. Work on a well-defined performance linked variable pay system that will help clarify roles also and encourage superior performance. Even a non-performer should be able to know where has she failed and what needs to be done to earn more.
  4. On the other hand, variable pay in the absence of clear performance criteria is bound to invite hostile attitude and result into widespread resentment. So, make sure that you have clearly defined AND well communicated performance criteria.
  5. Whatever you do, there will be some employees who try to inflate performance. System should be able to take care of them. Performance criteria must be such that they can not be manipulated and rather ensure that the actions deliver desired results. Otherwise, company would be rewarding manipulation and its own performance would go down!

A performance-linked variable pay may not reduce the wage bill in absolute terms; but with motivated employees who perform much better and deliver much more, in all likelihood it will help you reduce the wage bill in the long run and certainly from cost-benefit point of view. Just take care of the above points to ensure that.

Ashok Grover is an expert in people assessment and focused executive / leadership coaching. He is Director at Skillscape, a company with a vision of Value Creation by enhancing people and organizational competencies.

His last assignment was with the JBM Group as Corporate Chief Human Resource Officer. He has over four decades of experience in operations, materials, information technology and people development with Parle Group, Mohan Meakins Group, Hawkins Cookers Limited and JBM Group.

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