Re-thinking your Variable Pay Strategy…?

The inclusion of a variable pay component within a Total Rewards Package is increasingly becoming standard practice and employees now view the existence of the incentive plan as mandatory. The challenge for organisations today is to ensure that their incentive plans balance the requirements of the business, with the desires of the individual, offering something that differentiates you from your competitors while still remaining financially viable for the business.

Whether designing a new incentive plan, or just re-thinking an existing one, make sure you consider the following:

Specific Measures – the decision on whether a plan pays out to individuals should not be subjective or open to debate. Participants should clearly understand what needs to be delivered for them to achieve a payment. If there’s any confusion as to how payments are achieved participants will become disengaged and the plan will lose relevance. Organisations often want to reserve the right to adjust payments for exceptional circumstances like unforeseen market conditions however, in our experience, it would be more beneficial to recognise these situations with a different pay lever (such as a one-off payment or recognition) rather than flexing the structure of a plan. This can set an unintended precedent, particularly when exceptional circumstances become the norm. Maintaining the integrity of the plan, including how and when it pays out, should be paramount.

Simple and Transparent – incentive plans should be straight-forward enough that participants can work out their own payments with relative ease. If payments are made and individuals cannot work out how they were calculated their engagement in the plan will start to decline, together with their levels of discretionary effort. Similarly all elements such as qualifying criteria, triggers and/or multipliers should be communicated at the start and well documented so that individuals don’t receive any nasty surprises come payment time.

Meaningful – the more an incentive can be directly linked to an individual’s own day-to-day performance the more motivated they will be to achieve the desired results. If an employee cannot see how their own effort or performance impacts on the measures within their incentive they will be less likely to make changes to increase their performance. Effective incentives usually incorporate a mix of organisational and individual measures to balance individual motivation with the desire to drive teamwork and organisational objectives.

Clear in terms of desired outcomes – many incentives are linked to increases in company revenue or market share; as these are directly linked to organisational performance and also relatively easy to measure. But it’s worth asking: ‘At what cost?’ We only need to think back to the Global Financial Crisis to see the detrimental effects of pushing purely financial objectives; with no thought as to how these are being achieved. What behaviours will we accept and how will we ensure that the achieved results are sustainable in the long-term? Being clear about what you want to achieve and how you want to achieve it allows you to balance the all-important financial objectives with other key behavioural indicators such as customer satisfaction, staff turnover, retention of existing business as well as referral activity.

Self-funding – it can be tempting to create attractive variable pay structures, with above-market potential payments, particularly when attracting (and retaining) good talent is a challenge. However, the business needs to be able to fund ALL possible payment scenarios including any uplifts for overachievements. Every dollar paid to participants needs to result from more than a dollar earned for the business, otherwise the plan design becomes unsustainable.

Easy to administer – sometimes creating a variable pay plan that meets all the above criteria results in a complex, multi-layered plan that is a nightmare to administer. Add to this the fact that most variable plans are managed on spreadsheets and controlled by one individual, who is also the only person who understands all the elements and how they impact each and every possible employee scenario. All too often well-designed variable pay plans are pared back in order to make them easier to administer, but this can mean compromising the meaningfulness to employees. Organisations need to find the balance between those elements that create more value, vs those that just create more work.

R.Review, by Remesys, uses best practice solutions to:

  • Improve transparency within variable pay plans
  • Make informed consistent decision makin
  • Reduce the administrative burden of variable pay management
  • Ultimately freeing up your time to focus on designing the best plan for your business.

Still managing your incentives on multiple spreadsheets? Talk to us today about a demo of R.Review…Contact us to request a demo.

by Andrea van Olst