Article: How a company can make a variable pay strategy work

Compensation & Benefits

How a company can make a variable pay strategy work

Faculty at IIM-L will soon have a variable pay component added to its salary. Can variable pays be considered a long-term talent retention option?
How a company can make a variable pay strategy work
 

Variable pays are a smart move to provide employees a better chance to ‘perform and earn' thus benefiting companies

 

Faculty at IIM-L will soon have a variable pay component added to its salary. Can variable pays be considered a long-term talent retention option?

In a first among the most prestigious management education fraternities in the country, Indian Institute of Management-Lucknow is adding a variable component to the salaries of its faculty members. According to a report by Economic Times this new component, which is being introduced in the next three months is a result of an exercise to attract the best brains of the industry.The article quotes institute’s Director Devi Singh, “If one achieves targets they could get 100% variable pay.” Singh further adds, “The aim is to make this field an attractive employment opportunity. Professors should not feel constrained and this step will encourage them to take up more projects.” To implement it, ‘targets’ of IIM-L faculty will also be quantified. The step seems to have drawn inspiration from corporate structures which are using variable pays to boost performance and productivity. Variable pays link an employee’s earning directly to his and the company’s performance, and help good performers take home a fatter pay cheque. They are used in tandem with fixed components and help companies in a number of ways:

1. Help recognize employee contribution towards company growth: Amid all retention and engagement talks, here is a hard hitting fact- companies are most interested in retaining good and high performers and constantly face challenge of offering growth opportunities to them. The amount of variable pay that an employee gets to take home entirely depends on some clear metrics like specific targets, skills, initiatives etc. It helps companies identify good and extraordinary performers and work on future requirements like succession planning or identifying leaders. Variable pay for faculty at IIM, Lucknow will be based on a certain number of research papers, participation in national policy, innovation in teaching methods, and helping with development programs.

2. Help in retaining and rewarding good performers: An article on the site itsmyascent.com quotes Sakaar Anand, Vice President – HR, CA Technologies India, “In markets like India which are fast losing the cost competitiveness and with double digit inflation, the variable pay holds a lot of importance." Fair hikes and pays, and challenging opportunities are an important factor in retention of good performers. This is where variable pays become a differentiator. Excluding variable pay, a faculty at IIM, Lucknow earns between 7 lakhs and 18 lakhs, while s/he can potentially earn between 25 lakhs and 60 lakhs including variable pay.

3. Boosts up company productivity: The extra earning opportunities go a long way in encouraging employees to push envelop and work toward achievement of organisational goals. It is a win-win situation for both the employee and the company. Since variable pays are related to company performance also, it doesn’t put extra financial pressure on companies during slowdown.

Variable pays are a smart move to provide employees a better chance to ‘perform and earn’ thus benefiting companies in terms of productivity and profits. However, they do not work in any and every situation. To make variable pays work, it is essential to know their pros and cons and have a plan B in place rather than relying on them to meet long term organisational goals. Following are two things an organisation should keep in mind about variable pay.

1. When a company is promising variable pay to its employees it is necessary to identify the metrics (such as targets, skills, new projects) that the company wants to link with this component of the salary. Employees should have a clear communication about what would fetch them an extra income and what will not.

2. Variable pays work as short-term retention strategy but they cannot be considered as the backbone of retention strategy. In the long-term employees get habitual of going that extra mile and slump in income (due to reasons such as low company income in a financial year) may de-motivate them.
 

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Topics: Compensation & Benefits, #TotalRewards

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