Most likely, variable compensation works out well for you. But do you really know what it is? What do you get out of it? Which problems should managers avoid when setting it up?

In this article you can find the answers to these questions!

What is variable compensation?

Variable compensation, also known as variable pay, is a combination of bonuses on top of a base salary  designed to motivate, attract, and retain employees. Employee performance determines variable  compensation. It is also referred to as incentive pay or commissions. It can be in the form of cash or stock options. 

Variable pay can be viewed as a way to express gratitude to hardworking employees who directly contribute to the  financial success of the company.

It should represent attainable objectives. Trying to achieve unattainable goals will not benefit anyone in  the company.

The following are some characteristics of compensation pay:

To whom is variable compensation offered?

Variable compensation has long been a source of contention among salespeople. They are not solely based on the number of sales; increasing a customer’s share of the wallet, renewing contracts, or upselling products all benefit salespeople’s pay.

This compensation method is common in the service sector because it is frequently assigned to salespeople. It is also common in the manufacturing industry. This also applies to the banking and insurance industries.

Workers at all levels are offered variable pay. Juniors’ variable pay typically accounts for 10% to 15% of their fixed pay. It usually ranges from 15% to 30% for middle-aged people and 30% to 50% for seniors.

Why should companies adopt variable pay?

One of the primary benefits of establishing these incentives is that it allows employers to clearly communicate to employees what they expect from them. These incentives are in line with the company’s objectives and key performance indicators (KPIs) (Key Performance Indicators).

Compensation for accomplishments is a powerful motivator. Variable pay is believed to be an incentive for higher performance by 87% of salespeople. Depending on how they are phrased, these objectives can result in either a quantitative or qualitative increase in productivity, or both.

Furthermore, in addition to monetary compensation, employees feel more valued. If they achieve a goal, their teams are likely to compliment them. It contributes to a better working environment and increased team-building dynamics. It has a positive impact on employee engagement and retention.

Some concerns about variable compensation

60% of businesses typically combine multiple compensation systems at the same time. As a result, a complex compensation structure emerges. It is neither advantageous to employees nor advantageous to employers. As a result, 53% of salespeople believe that their compensation system is detrimental to the company. In this case, less is more, and having a single source of variable compensation allows professionals to benefit from it.

It is also critical to understand that, even if variable compensation provides numerous benefits, the base salary should remain appealing. A bad period may occur independently of the employee’s performance on occasion, and they should be confident in their base salaries. Staff should have a reliable safety net.

Unattainable quotas, as previously stated, are demotivating. The goals should encourage employees to be the best versions of themselves, with no rational limits on what is possible.

Furthermore, managers must exercise caution when establishing goals across departments. They should not be in conflict with one another. It is critical to focus objectives on a teamwork goal rather than an unhealthy competition among employees.

The goals must be completely transparent because if they are not met and no pay is given, the situation must be understandable. Employees must understand how much they are paid and how much is associated with each action. It will assist them in recognizing which aspects of their work require improvement and which are successful.

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