V o l u m e   10 , N o . 1
January 2010

Five Tips for Implementing a
Successful Variable Pay Program

As salary budgets continue to remain tight in today’s economic climate, many organizations are using “variable pay” to a greater extent in their total compensation programs.  Variable pay most often takes the form of lump sum bonuses or similar payout mechanisms that are not part of base salary. Such pay is called “variable” because the amounts awarded can and often do vary from year to year based on the performance of the organization, its operating units, and individual employees.

Implementing a successful variable pay program can be a challenging task.  Organizations will have a better chance for success if they follow the five following principles:

1.  First, be sure that a variable pay program fits into your business strategy and is consistent with the company culture you are trying to reinforce.  Don’t implement a variable pay program just because your competitor has one.  It has to make sense for you. 

2.  Second, involve employees and executives in the process.  Seek their feedback through focus groups, interviews or other vehicles, and use this information in your final planning.

3.  Third, create a system where the company’s objectives are linked to each business unit’s objectives, which in turn are linked to each employee’s objectives.  The approach whereby the objectives of the organization “cascade” down to each employee is an effective method to ensure everyone has a stake in the game, and all parts of the organization are moving in the same direction.

4.  Fourth, start slowly and be prepared to adjust.  Hardly any company gets variable pay absolutely right at the beginning.  Normally, there are tweaks and adjustments each year based on “lessons learned.”  So be prepared for this and don’t be surprised when it happens.  You might even want to start the variable pay program only with the executive team, and then slowly implement it with the other parts of the organization.

5.  Fifth, invest in training the management staff on how to effectively use and administer this program.  Managers, not executives, are the key population in an effective variable pay program.  Managers are the link between staff and senior executives, and must both educate their staffs on the elements of the program as well as ensure company performance objectives are being met.  Don’t leave them to figure out all the details on the fly.  It just won’t work.  Create an effective training program at the outset—it may be the most important step you take.

Til next time.

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