The Counsellor: Should we have variable pay for top performers?
If variable pay programmes do not lead to the right outcomes and behaviours, then the programme does not work
Vivek Paranjpe, Consultant & Strategic HR Advisor to Reliance Industries answers professional and ethical dilemmas faced by our readers at their workplace
I’m the head of the compensation and benefits team of a mid-sized IT company. We’ve been working to modify the ratio of variable to non-variable components in salaries for our employees and introduce a pay structure that highly rewards top performers. We had rolled out this modified pay structure for our top executives this year. While it had a positive effect on their performance, due to market conditions and general macro-economic issues, the company didn’t perform well vis-à-vis competition. This has created disenchantment. We hope to roll out this plan for the rest of the company this year. I am worried that in such an economic climate, this rewards structure will result in a flight of talent to our competitors. What should we do? – Mr Should-We-Have-A-Variable-Pay-Structure
Dear Mr Should-We-Have-A-Variable-Pay-Structure,
Any variable pay programme is a product of a set of objectives for which it is created. Its design and administration has to lead to the achievement of those stated objectives.
When you rolled out the first programme for the top executives, I am not sure what the objectives were, and if the programme design was well communicated to the individuals. Variable pay can be a substantial component of the total compensation.
Factors to consider while designing the programme are:
1. It must be transparent
2. Part of the variable pay is linked to the individual and functional performance. For this the objectives/KRAs and KPIs have to be evolved. They have to be challenging but realistic with built-in mechanism for periodic reviews and communication.
3. For senior leaders, a part of the variable pay component is linked to the firm’s performance. In this case, there has to be complete clarity on what is expected and the performance parameters of the corporation have to be well communicated and reviewed.
You have stated that the company didn’t perform well vis-à-vis competition. If that is the case, and if you have a well-crafted performance management programme, this should not be a surprise to the top leaders and they would have expected dip in the variable pay.
Under such circumstances wherein the top leaders are unhappy, you want to rollout the variable pay programme for rest of the company, this indeed will be challenging since your spokespersons who are supposed to sell and administer the programme themselves are unhappy.
Keep in mind few ground rules while you create a programme, especially if it is being created for a large population, remember the variable pay can be sizeable proportion of the total compensation:
1. Employees should have an ability to influence / make an impact on the performance for which the variable pay is being designed.
2. There has to be review and reporting mechanism along with ability to generate data against the performance on a periodic basis so that the employees are not surprised at the end of the year. This also ensures their ability to take corrective actions during the year.
3. The performance parameters should lead to generating the right behaviours amongst the employees. If variable pay programmes do not lead to right outcomes and behaviours, the programme does not work.
I am always uncomfortable with a company-wide programme for obvious reasons. Instead of such programmes, at the lower levels of hierarchy, corporations have to think of productivity-linked incentives that are easier to administer and manage like a sales incentive programme, production incentives in manufacturing, etc.
Vivek Paranjpe is Consultant & Strategic HR Advisor to Reliance Industries. Allow Vivek to clear your career and professional dilemmas by writing to us at firstname.lastname@example.org