Organizations often want to introduce variable compensation to retain employees. However, it is not a given that this works. A successful implementation of variable compensation therefore requires careful preparation and calculation, and alignment with the organizational strategy. Highberg’s consultants oversee this entire process and can help companies make and implement the right choice.
Compensation that depends on performance – that is, in short, the definition of variable compensation. These can be performances of individual employees, of teams, of departments or of the entire organization, in the short term or the long term. For example, an organization may choose to give individual employees a bonus for achieving hard KPIs. But an employer may also prefer a profit-sharing scheme. And there are many more options. Whether variable compensation is a good idea or not, and which scheme is most appropriate, depends on the compensation philosophy and the culture of the organization.
One reason that many companies opt for variable compensation in addition to a fixed salary component is that they assume that this motivates employees, causing them to perform better. Yet there is little scientific evidence for this. What is now clear, however, is that variable compensation steers behavior. As soon as an organization sets goals and links a bonus to them, employees pay more attention to such a goal. An advantage of variable compensation is also that these wage costs move with the results of the company.
That sounds positive. And it can be. But the instrument can also backfire. If a sales employee is rewarded for the amount of turnover he generates, and he realizes this turnover by mainly pushing easy-to-sell products into the market, this may conflict with the sales strategy of the company. It is therefore important to think carefully in advance about the consequences of variable compensation. The same applies to the goals that are set for it. These must be realistic, otherwise they will be counterproductive.
And there is more to it than that. For example, the market conformity of the terms of employment package, including the variable compensation. What exactly is the sum of the fixed and the variable part? And what if all employees achieve their goals, can the scheme then be afforded for the organization? And in five or ten years? Or should the organization put a ‘cap’ on the payment? What about the legal side of the scheme? The approval process for the Works Council and the communication with the employees? In short, variable compensation is not that simple. It requires a lot of preparation, knowledge and overview.
Highberg’s consultants know the ‘ins & outs’ of variable compensation like no other and can guide clients from A to Z in this process.
