This guide is part of a progression set comprised of Core, Advanced, and Emerging Total Compensation practices. 

What it is

Historians believe Ancient Egypt was the first civilization to provide its workforce with variable compensation—this would indicate that humanity has been driven by a pay-for-performance mindset for more than 5,000 years. In essence, variable compensation is any bonus, incentive, or one-time cash payment provided to employees in addition to their base pay to recognize their hard work and contributions to the organization. It is a reality that recognition is essential for all employees—regardless of their organizational level—and such recognition can come in diverse ways, whether symbolic awards, cash amounts, in-kind gifts, or stock-related grants.

Most employees may assimilate the frequency and recurrence of paychecks as “stable” and “predictable” elements. Consequently, compensation consultants have identified that any aspect on top of base pay can drive interesting behaviors among the recipients—additional money is always well received! Therefore, variable compensation and recognition programs have become a valuable and effective way to show appreciation and credit for how employees’ hard work is making a significant impact within the organization/team to which they belong.

Why use it

Variable compensation is a versatile scheme that can be applied to every job across the spectrum—agriculture, arts, construction, finance, production, sales, sports, etc.—since keeping people focused on attaining specific objectives is prevalent everywhere. It would be exceedingly difficult to find an organization now whose mission and vision were oriented towards failure and has reached a point where shareholders are pleased with it and have rewarded them for such an underperforming behavior.

The practices at this level illustrate why organizations should consider implementing variable compensation plans and other recognition programs as part of the overall value proposition for employees. Further, determining the right pay mix for employees is of utmost importance to ensure proper focus on the execution and delivery of results related to short- and long-term objectives.

Expectations continue to rise about the extent to which technology will be a significant player in every organization, especially with everything related to the adoption and application of artificial intelligence (AI) and the projected enhancements it can bring to business and society. Therefore, compensation designers should be prepared to embrace the benefits of such technological advancements to continue being a trusted and reliable partner within HR and for business leaders. While it is ambiguous how the world will look in the near future, some aspects are expected to evolve and eventually become a solid practice a few years from now.

Outcomes

After implementing these practices, the compensation designer will understand how variable pay and recognition programs increase productivity in the organization, build loyalty and commitment, empower the workforce, develop partnerships across the organization, and provide employees with an opportunity to receive attractive rewards.

Through different examples and commonly found situations in the market, these practices will help design variable pay and recognition programs that best suit the organization’s current state and drive desired behaviors. Further, the quality of conversations between managers and team members that arise from recognition programs can inspire employees to continue examining what they do, how they do it, and how they can do their work better. Altogether, this can become the basis of a continuous improvement mindset.

Practice guides at this level

Developing incentive programs that drive outperformance and desired behaviors across the organization.

Producing supplemental pay programs by identifying appropriate "at risk" levels and designing calculation methods for each role, including the design of specialized sales, management, and production incentive plans.

Defining diverse types of awards to support the organization’s culture and enhance overall employee engagement.

Designing specialized awards that drive and support employee engagement in recruitment, continuous improvement, sales, and other recognition-worthy accomplishments.

Designing a long-term incentive plan for key roles to foster desired future outcomes.

Creating rewards programs to Incentivize long-term organizational performance with cash-equivalent (e.g., stock) payouts in public and private organizations.

Aligning the compensation strategy with the future of work to continue to attract and retain talent effectively in an evolving workplace.

Leveraging trends in compensation that will require attention to address rewarding skills vs. "whole" jobs, the expanded use of contingent workers, desires for different pay mixes, and the impact of AI in compensation management.