Organizations are shifting their reward program structures towards variable pay.

There’s a current, growing trend where many companies are moving their corporate reward program structures towards variable pay over fixed costs (base salary). Doing so allows them to shell out the cash to their highest performers, and make them earn it annually by accomplishing new goals. This message validates the importance of the employees’ productivity in their roles. It also invites them to help the company achieve its growth strategy and share in the rewards.

The compensation strategy and approach here is to keep base pay competitive with the market while giving employees an opportunity to earn more with incentives. This is only a replacement for paying competitively to the market on base pay if the earnings of the incentive plan are significantly higher than what the market would typically pay. Generally, incentives need to be pegged, at least partly, on company performance. Nobody wants to pay out bonuses when the company’s results are poor. At most companies, a common challenge is that employees have no idea how the business is doing, or whether they will likely get a bonus. If it comes, it’s like manna from heaven. If it doesn’t come, people feel cheated.

Rewarding high performers, and ignoring mediocre performers, can correlate strongly to greater overall corporate performance. However, achieving this goal requires advanced research, planning, performance tracking, ongoing communication, and evaluation to determine whether the incentive ultimately works as intended. Establishing an activator goal that sets a threshold before any payout occurs demonstrates fiscal responsibility.

Not all employees are always deemed eligible to participate in the corporate incentive plan. There are pros and cons to requiring a specific performance score for employees to become eligible to participate in the corporate incentive program. For example, supervisors have been known to hyper-inflate scores to avoid conflict. Highly-commissionable positions, such as Mortgage Loan Officers and Commercial Loan Officers, are often deemed ineligible due to their incentive payout on individual monthly or quarterly productivity. Sometimes only those hired by January 1st of the plan year are eligible. Other companies may prorate the payout.

It’s imperative for employees to understand that a corporate incentive plan can be canceled or modified at the will of the board.

The last thing you want to develop is an expensive entitlement program that demolishes morale if the plan ends or changes. If your compensation strategy is to pay competitively to the market, average corporate performance should equate to the average market-based incentive amount for that position. A few companies still reward the CEO at the same percentage in income as the teller for an annual bonus. Rewarding everyone in the same way, regardless of the conditions, is often a recipe for wasting available resources. In some ways, this approach underpays severely enough to make it non-motivational in other ways.

Finally, during the last 3 years, it has become increasingly clear that employee satisfaction and engagement have just as much to do with the quality of the work culture as it does with rewards. Recently I had a board member say to me, “We have a unique culture here that is family-friendly, and that minimizes the need for market-based pay because people want to work somewhere they are treated well.” Having a family-friendly, inclusive culture is the minimum viable product for employee engagement. It can not be used as a reason to pay under the market on base or variable amounts.

Back to Blog