Common Forms of Variable Pay

• Bonuses: One-time payments for achieving specific goals or milestones.
• Commissions: Percentage-based earnings directly tied to sales or revenue generation.
• Profit-sharing: Distribution of company profits among employees based on performance.
• Performance-based incentives: Rewards tied to individual, team, or organizational performance metrics.

The percentage of variable pay in the total compensation package differs across industries and roles. For example, sales profiles may have a greater percentage of variable pay than administrative profiles, which mirrors how sales performance directly impacts revenue of the company.

1. Clear Communication

Clearly communicate the criteria, methods of calculation, and possible earnings related to variable pay. As an HR manager, one conducts a number of workshops with employees in order to explain variable pay. During the workshops, by using visual aids and examples from real life, enable the employees to understand how the performance metrics impact their pay.

2. Fair and Achievable Targets

Inculcate realistic performance targets so that the employees remain motivated and their trust is maintained. These targets, as per the HR team, are challenging but achievable in the light of past performance of the candidate as well as the potential growth of the market.

3. Regular Review

Variable pay structures shall be regularly reviewed for relevance and usefulness—that is, whether they are serving the purpose. The HR department reviews the usefulness of variable pay structures on a half-year basis. They solicit the views and feedback from the employees and managers, analyze the effectiveness of the current metrics, and adjust targets or criteria accordingly.

4. Employee Involvement

Involve employees in the design and review process of variable pay structures to ensure buy-in and transparency. This creates a sense of ownership and understanding of the compensation system, leading to better acceptance and motivation.