Companies can use a variable pay system to show their appreciation for hard-working staff members who directly contribute to a business’s financial success. Providing an opportunity for pay raises or cash bonuses can inspire employee loyalty and encourage them to meet production goals. Understanding how variable pay works can help you determine if this type of system can benefit personnel and suit a company’s needs.
In this article, we define what variable pay is, discuss the different types of variable pay employers use to reward staff, and list eight ways companies can benefit from incorporating a variable pay system into their management framework.
What is variable pay?
Variable pay is a compensation strategy that involves increasing wages based on certain factors, like the quality of an employee’s job performance and project results or a department’s overall productivity. For example, if an employee increases their sales, works efficiently, and shows high-quality teamwork skills, a company may offer additional cash according to the terms of their contract. This performance-based salary system is often in the business industry, where individuals can receive compensation based on their personal contributions to a company’s financial success.
What are the different types of variable pay?
Employers may award different types of compensation in a variable pay system. Here are some of the most common types of variable pay executives use to reward successful employees:
A seasonal bonus is a cash gift that companies typically offer employees during a specific time of year. Employers usually offer seasonal bonuses to show gratitude for their employees and motivate them to perform well in the future. For example, executives may provide seasonal bonuses during the winter holiday season to reward employees for their hard work and dedication throughout the previous year, plus supplement common expenses during this time. Seasonal bonuses are also common during times of the year when companies expect higher workloads, such as at the end of a financial quarter.
Cash bonuses involve an employer adding a lump sum to a staff member’s standard wages. Companies typically offer cash bonuses as a reward for a particular accomplishment or workplace event. For example, an employee may qualify for a cash bonus if they find a high-paying client, allowing a company to earn more revenue. Employers can offer cash rewards for other reasons, such as a gift to welcome a new employee or thank a current one for recommending a top-choice job candidate. They may also offer this gift to long-term staff members to show their appreciation for company loyalty.
A performance bonus is an additional payment an employer can offer as a reward for high productivity and financial success in the workplace. A performance bonus can take the form of a cash lump sum, but some employers offer regular performance bonuses throughout a fiscal year. This can encourage employees to stay productive and produce high-quality project results. Some companies provide performance bonuses to entire departments or teams after they work together to meet a common goal.
Sales commissions are portions of a company’s profits that employees who complete successful sales can earn from these deals. For example, if a sales representative closes a deal that produces substantial income for their employer, they might earn a percentage of the deal’s overall revenue. If these professionals make a 5% commission from every sale they accomplish, they can increase their income over time and supplement their usual scheduled wages.
Profit-sharing programs involve rewarding employees for helping a company succeed by offering a percentage of the company’s overall profits during a financial quarter. For example, executives of a company that makes $900,000 during a financial quarter may offer 0.05% of profits for employees who exceed their sales quota during this time. As a result, these employees can earn $450 alongside their base salary. This can especially benefit staff at large-scale companies that generate massive sales.
Gifts describe any item given to staff members by their place of employment. This type of variable pay can make employees feel appreciated by their management and encourage them to continue performing at a high level. Some common gifts include all-expenses-paid trips, computers or phones, gym memberships and gift cards. Employers can also provide gifts on a smaller scale, such as restaurant coupons or other retail discounts.
Differential pay refers to a variable pay system that provides increased wages for certain workplace tasks. Common forms may involve offering payment for early morning or overnight shifts, as fewer personnel may sign up for those work hours voluntarily. Executives or supervisors may also offer differential compensation for extra assignments. For example, if a company offers an additional $5 per hour for overnight shifts, then a staff member who typically earns $10 would earn $15 per hour if they worked during that time slot.
8 reasons why you may offer variable pay
Here are eight potential advantages of implementing a variable payment system:
1. Lowers base salaries
Employers can often provide a lower base salary by using a variable pay system, as they can supplement incomes with alternative payment opportunities, such as performance bonuses or commissions. Employers can save money on a higher base salary and instead only provide compensation to high-achieving staff members who exceed a company’s expectations. As a result, they can use these saved funds for other investments and business ventures.
2. Increases staff retention
Variable pay can also help increase staff retention, as employees may remain loyal to a current employer if they can increase their earnings through a high-performance rate or successful project results. For example, consider a staff member who receives a job offer from a competitor company that offers a higher salary. If the supplemental income they can earn from variable compensation has a higher overall value than a base salary increase, they may decide to keep their current position and feel encouraged to increase their job performance rating.
3. Encourages employee success
Variable payment systems can benefit companies by encouraging staff productivity and success. Employees’ motivation to meet goals and quotas may increase if they can receive a desired form of compensation afterward, such as a cash bonus, sales commission, or high-value gift. Using variable pay as part of a company’s management framework can instill a productive work environment where employees can feel appreciated for their efforts.
4. Provides a framework for measuring work progress
Variable pay can encourage management to define metrics for productivity and progress in the workplace. To properly compensate employees for their exceptional work, it’s important to create a system where supervisors can gauge the quality and efficiency of an employee’s work efforts. By providing a specific framework, employees can have an easier time excelling in their tasks. It can also help a company develop its long-term expectations for personnel and overall goals for a department.
5. Enhances recruitment efforts
Variable pay can help human resources (HR) professionals recruit new employees. The ability to supplement one’s income through cash awards and other forms of compensation can motivate a candidate to apply for a position, especially when paired with a competitive base salary and job benefits like health insurance. It may also encourage employees with a high work ethic to apply for positions, as they may feel inspired to improve their job skills and accomplish extra tasks to receive increased compensation.
6. Demonstrates appreciation for staff efforts
Including variable payment options can show employees how much their management team appreciates their hard work and dedication to their job duties. As a result, employees may feel valued in the workplace and encouraged to improve their skills. Executives can use this tactic to maintain an efficient, productive and amicable staff dedicated to helping a company succeed.
7. Encourages teamwork to accomplish common goals
Variable pay can also encourage teamwork among employees, as they can all benefit from meeting common company goals. It can serve as an incentive for departments that show high levels of productivity, which may encourage employees to develop trusting relationships with their colleagues. A strong sense of teamwork in a workplace can have widespread positive effects on a company, including increased profits and overall enthusiasm for completing job duties.
8. Provide clear work expectations
Offering a variable pay framework can allow employers to better define straightforward work expectations. When employees have an outlined set of expectations and goals from management, they can work toward specific targets along the way, which can allow them to meet both short-term milestones and long-term objectives. Staff members can also know exactly what their job duties involve and adhere to a specific timeframe when completing these responsibilities.
I hope you find this article helpful.