Variable Pay - Then and Now
The practice of linking pay to performance has been around for a
while. However, what’s new is that the percentage of pay that is linked
to performance and the way in which the same is structured around
different components of performance is new. We all know about the system
of increments and bonuses in the Government and Public Sector. These
were designed in such a way that the employee’s performance is rewarded
proportionally. However, the quantum of bonus and increments was so
small that it hardly had an effect on the pure play linking pay to
performance. The resulting inefficiencies in the government and public
sector have been extensively reported.
In recent times, the concept of linking pay to performance has taken
on an entirely new dimension with the introduction of variable pay. This
article discusses some aspects of the variable pay and performance
linked incentives in place in the contemporary organizations.
How it Works
One of the key components of this variable pay plan is the strategy
of linking pay to performance. This is a strategy that has been followed
by many Multinational companies across the world and consists of the
overall pay structure being broken down into components. These
components would include the basic pay, benefits and the variable pay.
The variable pay would be paid out as a percentage of the whole subject
to the performance of the employee. For instance, if the employee gets a
grade of 2 on a scale of 1 to 4, the variable pay would be 70-80% of
the eligible amount and if the employee gets a grade of 1, the variable
pay would be 120-100% of the eligible amount. Accordingly, the
performance of the employee determines the variable component of the
salary. The international practice is to increase the component of the
variable pay higher according to the hierarchy. This would mean that at
senior levels of the employee hierarchy, the variable component can be
as high as 50-60% of the overall pay.
Categories of Variable Pay
Further, there can be different categories of variable pay. The first
component of the variable pay can be linked to individual performance,
the second component can be linked to division performance and the third
component can be linked to company performance. The idea behind
variable pay is that it provides an incentive for employees to feel a
sense of ownership and take responsibility for their jobs as well and
relate to the overall division and company. By introducing variable pay,
the management would ensure that employees are motivated to contribute
individually and as a unit and a division and finally as part of the
whole company. As outlined in the section on retention strategy, the
sense of alienation of the employees can be reduced by making them feel
part of a whole and not treat them as individual “cogs in the machine”.
Conclusion
In conclusion, this article has discussed variable pay and
performance linked incentives as a necessary evolution to a system where
merit is recognized more than it is being done now. Given the fact that
many organizations in India follow this approach, it is time for the
employees and prospective employees to attune themselves to this concept
and work accordingly
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