How to Choose the Right Variable Pay System for your Organisation

As employers, we must have often heard that ‘recognition is the biggest motivator’. And no matter in which era or industry, or with which work model we work, this saying remains true for all generations and all geographies. In fact, there exists a direct correlation between recognition and employee retention. 

According to a recent study by the US-based employee recognition company O C Tanner, as many as 63% of employees are less likely to leave a job if their efforts are recognised and rewarded. And around 81% of them feel motivated to work if they receive appreciation for their efforts from their managers.

Thus, it is important for us as employers to understand the significance of recognising and rewarding our employees’ efforts. One of the most effective ways of recognising employee efforts is by offering them variable pay.

But what is it? How does it really help us motivate our employees, and how should we choose the right variable component for our organisation? Let’s find out the answers to all these questions in this article.

What is variable pay in CTC?

It refers to the amount which we as employers pay over and above the fixed compensation of our employees. It is generally paid out in the form of bonuses, commissions, and/or incentives.

The payout of a variable component depends on two factors, namely the performance of our employees as well as the performance of the company as a whole. It can either be paid as a fixed percentage of the fixed compensation of the employee if they meet the desired targets or as a certain percentage of the profits earned by the company. At the time of hiring an employee, we must include a variable component in their CTC and clearly define when it is payable.

Why should employers offer variable components in CTC?

Employers must provide variable components to employees to keep them motivated. It helps us inculcate in them a feeling of being valued for their efforts. When they know that their company values their work, they work even harder, increasing their productivity and efficiency levels. All this results in higher profits and higher employee retention rates for us.

Types of variable component systems

Following are the three most popular types of variable component systems adopted by employers in India -

Bonus system

It is one of the most popular forms of variable compensation. It is usually a lump sum payment and is paid at least once and at most twice a year when an employee performs better than the company’s expectations.

 In a bid to attract and retain good talent, companies nowadays also pay a joining bonus and a retention bonus over and above the fixed compensation of employees. These two bonuses are only paid once during the entire association of the employee with the company.

The amount of bonus is generally a fixed percentage of the employee’s fixed pay.

Profit-sharing system

Under this system of variable compensation, an incentive is paid out to employees when either their department or the company as a whole performs well and earns a good amount of profits. This system helps us as employers to make our employees feel like they belong to the organisation. It helps us avoid making them feel left out and un-incentivised in times when the company is doing good.

This kind of variable compensation is equivalent to a certain fixed percentage of the profits earned by the company or a specific department in a fiscal year. Additionally, the discretionary executive bonus plan can also complement this system by offering performance-based bonuses to executives.

How to choose the right variable compensation system for your organisation?

So, how should one decide on a compensation strategy? Read on to find out how we can choose the right variable compensation for our employees:

See what your competitors are offering

It is tough to attract and retain good talent, and thus all employers must put their best foot forward when it comes to paying the right compensation to their workforce. To understand what kind of variable compensation is preferred by your employees, check what your competitors are offering. We can find this information with the help of various employment surveys and studies available online. We can also use Unkover to get more insights into our competitors' strategies without having to do so manually.

Give importance to both talent and experience

While choosing a variable compensation system for our organisation, we must give importance to both the skill set and experience of the employee. This helps us in arriving at a variable compensation system which is objective in nature and can be used in a bias-free manner by the team leaders. The presence of a well-defined and objective variable compensation system helps us avoid issues of employee dissatisfaction due to a lack of pay equity in the organisation.

Check employee surveys and questionnaires

The amount that is offered as variable compensation should meet the expectation of our employees; otherwise, we won’t be able to boost their motivation levels or productivity. In order to choose the right variable compensation system, we must get a clear understanding of our employees’ expectations. This can be done with the help of honest one-to-one conversations with them during performance reviews as well as via employee surveys and questionnaires from time to time.

Conclusion

Employees are the most important resource for any organisation. And thus, to keep employees motivated and encouraged to work with us, we must recognise and reward their efforts whenever they exceed our expectations. Not doing so can give rise to discontentment and force them to look for job opportunities where they feel more valued. 

Over the years, providing a variable pay has emerged as an effective way of meeting the recognition needs of employees. We must design a variable compensation system that is objective and fair in nature so that we can use the same for the long term and keep employees satisfied with it.

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