If you’re a business leader at a professional services firm, you know just how important it is to attract and retain top talent and keep your employees motivated. However, you’re probably also on the hook to meet a number of business objectives and maximize the productivity of your team. One solution to this managerial paradox is variable pay.
What is variable pay?
Variable pay, also known as variable compensation, is a type of employee compensation that is contingent upon the achievement of a goal or objective. It is designed to motivate or reward employees who contribute to the success of an organization. It is estimated that 77% of organizations offer some form of variable pay, such as bonuses, incentives, commissions, profit sharing, and other performance-based rewards.
Pay for performance
For leading professional services firms, variable pay is often distributed as cash or other monetary compensation and paid in regular intervals. It is combined with a fixed pay component (i.e., base salary) and is a key part of the total compensation package, especially for those organizations looking to boost retention, loyalty, and engagement.
Variable compensation plans can be built to optimize specific company objectives as well as team or individual performance. (Think of common KPIs like revenue, gross margin, or billable hours.) A well-designed plan incentivizes employees to contribute to the success of the organization and avoids putting them on the costly path of disengagement.
Types of variable pay
To break down the common types of variable pay, you can think of employee compensation like a tree. If an employee’s fixed pay or base salary is the tree trunk (i.e., a source of stability and a reflection of maturity and experience), then variable pay is one of the big, sturdy branches that make up the canopy — alongside PTO, 401K contributions, equity, health and wellness benefits, and more.
There are two key offshoots on the variable pay branch: Bonuses and Incentive Pay.
What is a bonus?
Bonuses or Profit Sharing are like the fruits of a tree given to employees as a reward for their performance or shared success. For better or worse, fruit comes just once a year and it is only when it is fully ripe that you know how bountiful and tasty the harvest will be. Similarly, bonus and profit sharing plans seem subjective to many employees since they lack visibility to the decision-making process.
What is incentive pay?
Incentive Pay is more akin to a tree’s leaves as it is directly tied to a set of goals or objectives that are carefully tended to and cultivated to produce the desired outcome. Incentive plans are pre-defined, objective, and well communicated which creates consistency and predictability for employees. Commissions are a common type of incentive, especially for sales or commercial teams.
Both discretionary and non-discretionary types of variable pay can be useful within the context of professional services. Rewarding and incentivizing employees for their individual and collective contributions is an effective way to demonstrate that your organization values its people.
The pros and cons of variable pay
Variable pay is a popular compensation tool for professional services organizations as it aligns the interests of employees with the overall goals of the organization—the ultimate goal, of course, is to drive higher levels of performance, productivity, and employee satisfaction. Beyond talent management, it can also promote economic balance and perceived equity by rewarding employees based on their actual performance. By linking pay directly to performance, variable pay provides employees with a clear motivation to perform at their best and stay engaged with the company.
However, a variable pay program also comes with its own set of challenges. It may create an administrative burden for business leaders and people managers by requiring additional tracking and reporting—which can be prone to user error if it is not systematized. Also, if there is a lack of transparency in how variable pay decisions are made, it may lead to confusion or mistrust among employees. This type of perceived inequity can lead to morale issues and higher turnover.
Choosing the best type of variable pay program
Like many business decisions, first and foremost, you should align your variable pay program with the overall business objective. If you are trying to drive specific actions like employee referrals or retention, a spot bonus may get the job done. If your goals are more nuanced or require employees to work collaboratively toward a key result, a well-constructed incentive plan may be more effective.
Additionally, your variable pay program should resonate with the values and beliefs of your organization. If transparency and accountability are an important part of your company’s culture, then make sure your variable pay program has clear, measurable criteria to decide who receives a bonus and how much everyone could be paid. Then make sure the model is applied consistently across the organization so payouts seem fairly distributed across departments and between individuals based on their actual level of effort or performance.
Ultimately, your chosen variable pay program should be tailored to the specific needs and priorities of your organization, while also considering the individual motivations of your employees.
Tools to manage variable pay programs
Incentive management software can level up your variable pay program. These tools are designed to help HR leaders and people managers ensure that variable pay is tied to specific performance metrics and goals, making the process more transparent and data-driven—from creating incentive plans and setting measurable targets to tracking employee performance and calculating payouts.
For professional services firms or any other organization where employee compensation is a large part of their operational expenses, it is also important to forecast variable payouts for accrual accounting purposes. Leading incentive management tools will have this ability as well as the option to provide a payout estimate directly to employees.
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