Global Human Capital & Associates

Variable Pay Considerations and
Trends for 2008

As we approach the end of the year it is usually the time to assess Sales Incentive Plans, Sales Support plans along with Management Bonus Program of 2007, and to contemplate changes for 2008.  Every one would like to have all their variable pay programs in place at the beginning of the year so that they are able to jump start the sales organization, support teams, and management with specific quantifiable goals, measurement scales, and payout calculations and payment schedules.  Unless we get these plans into the hands of the employees early in Q'1 2008, they might be distracted and not put their full attention to the business.

Typically the base pay portion of the total pay does not change too much from year to year but the variable pay can and this generates a lot of discussion around planning, measuring costs and whether the program is achievable. In general variable pay programs are becoming more predominant in most organizations throughout the world. They are becoming more formalized and less based on the discretion of a manager. The performance measures are becoming better linked to individual, group and organizational success. Organizations that use variable pay programs enjoy an effective competitive advantage in the marketplace, because their employees understand what is critical for the business to succeed and know they will be rewarded based on those achievements.

When designing or modifying a variable pay program, one needs to keep it simple to explain three measurable elements.  Otherwise, the plans may get diluted and the individual may lose sight of the key measurement principles.  The most common measurements that are recommended are as follows:
  1. Margin Performance or Profit Contribution by Business Unit or Company depending on the role of the individual
  2. Individual goal attainment via quota revenue performance or product
  3. New Account opportunities or Customer Satisfaction
When creating and implementing an efficient variable-pay plan, there are a few considerations that should be considered:
  1. The commission scale should increase proportionally, as they get closer to achieving goal.  It is much harder to achieve 80% of goal vs. 50%
  2. One should consider being very aggressive on overachievement.  The cost to the company is minimal once the individual achieves goal and it makes a win/win for both the company and individual
  3. Where possible some of the variable-pay elements should be paid quarterly to reward the person on immediate results and the longer-term measurable elements can be paid annually.  Any overachievement performance should be paid at the completion of the business year incase there maybe charge backs due to poor collections or returns etc.
  4. No plans should be capped on earnings potential since this may be a demotivator for overachieving within the given year and possibly encourage moving the business opportunities to the following business year.  Some organizations call this "sandbagging"
  5. Where possible try to establish a measurable component encouraging a  spirit of team cooperation
To create and implement an efficient variable-pay plan, management must make a commitment to define employee expectations in behavioral and measurable terms. This means making goals realistic and achievable, profitable, and practical for both the company and its employees. The key to the success of variable compensation is to have something you can measure and understand which can be linked to creating economic value for both the company and employee.

Instead of continually ratcheting up base pay, more companies are adopting or expanding their variable pay programs, at all levels, to reward outstanding achievement without increasing fixed costs.

If you are interested in having an independent assessment around your measurement systems, performance planning, management practices, culture values, and other measurable factors that are essential for success of your business, I would be happy to meet with you to further brainstorm.  Each company has a unique set of reward standards, which is tailored to their specific needs and needs to be preserved.  The net result should be to have high-impact variable pay programs that are leading edge to your competitors.

  Industry Trends
Market Brochure
Press Release - March 2007
Variable Pay Considerations and Trends for 2008
2009 Salary Trends
Observation Trends
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