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The concept of variable compensation has begun to play an increasingly important role in defining employer value proposition, attracting, retaining and motivating talent in organizations. They also align with the ‘pay for performance’ culture valued by most companies. Simply defined, variable compensatíon is any form of payment that is not fixed or guaranteed, and includes sales incentives, cash bonuses, deferred payouts or long-term incentives as well as company shares or stocks. These are directly linked to the achievement of targets that are a mix of both quantitative as well as qualitative measures, and form an important part of the total compensation proposition.
At one end of the spectrum, sales incentives for frontline sales employees often constitute a significant portion (50 percent-plus) of their total compensation. In some industries, frontline sales staff is on 100% variable compensatíon plans but with significant upsides based on achievement. Typically, sales incentives commence beyond a ‘normal threshold’ of performance, i.e. only when sales achievement exceeds normal targets expected for which the fixed salary is payable.
Cash bonuses are typically based on individual as well as company performance, and have been trending towards qualitative measures, and incorporate both the ‘what’ as well as the ‘how’ while evaluating performance. They are generally discretionary although a number of employers mathematically link these to a percentage of salary based on performance ratings.
Long-term incentives as well as stock awards are a retention tool, and focused on employees who are identified as high potential talent, and considered essential in the longer term cycle of the organization. While the award amounts are decided and communicated in a particular year, they are vested or exercised over a period of years (typically three or four years), and are awarded in recurring cycles. Global trends point to an increase in various forms of variable compensation as companies strive to keep fixed costs constant, and link rewards to financial performance.
• Variable compensation includes incentives, cash bonuses
• It is an important part of the total compensation proposition
• Long-term incentives as well as stock awards are a retention tool
Source: Monindra Grover, Special to Jobs & Careers
The writer is Regional HR Leader - Middle East & North Africa, MARSH