Variable pay

Image courtesy of Pbiboon/ FreeDigitalPhotos.net

I mentioned several time in my past posts the concept of variable pay. Well I just finished an Organizational Behavior course (Langton, Robbins, Judge, sixth edition) that explains several programs and their advantages. I thought it will be a good subject to write a post about.
Variable pay programs allow for employees to exercise that extra effort into a job to provide exceptional outcome. It is a mean to show an employee that his/her contribution is valuable.

Those programs are divided in three main categories, the individual programs, the group programs, and the organizational programs.

There are four main types of individual variable pay programs:

1. Piece-rate wages: a popular program as it compensates production employees by paying a fixed sum of each unit of production completed. A pure example that does not include any base pay are the people who work at baseball parks selling peanuts and soft drinks.


2. Merit-based pay: it pays for individual performance based on appraisal ratings. Most large organizations have merit-based pay programs. They are typically based on end of year performance appraisals and they are in forms of a salary increase.


3. Bonuses: bonuses reward employees for recent performance rather than historical performance and are one-time rewards rather than ongoing.


4. Skill based pay: is an alternative to job-based pay and it is based on how many skills employees have or how many jobs they can do.

As for the group based incentives, well there is only one really, and it is called gainsharing. It is a formula-based incentive plan that uses improvement in group productivity from one period to another to determine the total amount of money to be shared.

There are two main forms of organizational-based pay for performance:

1. A profit-sharing plan in which the employer shares profits with employees based on a predetermined formula. The difference between this one and the gainsharing explained above is that it is based on the profits rather than productivity.


2. An employee stock ownership plan (ESOP) is a company-established benefit plan in which employees acquire stock as part of their benefits, companies can also match parts or the full employee contribution which renders this plan very interesting. However, Canadian companies lag far behind the US in the use of ESOP because Canada’s tax environment is less conducive to such plans.

Next time you want to negotiate your compensation plan with your boss or with a future employer, be creative in using any of the above-suggested plans to get what you think you deserve!

Please note that those plans are not for sales people but for production workers like I was before I started working as sales person. I will write more about commission based pay in another post.