Variable or incentive pay is compensation that does not become part of employees’ regular salaries and can fluctuate from time period to time period. According to a 2018 survey conducted by the national compensation organization World at Work, 96 percent of private companies offer some type of short-term incentive.
Incentives can range from an annual incentive plan, spot awards, discretionary plans, profit-sharing plans, project-specific plans, and team or group incentives. Because these types of plans provide a reward for a specific level of performance during a defined period of time, the ongoing financial impact is minimal, unlike a traditional raise that is cumulative and can impact not only regular paychecks, but also the cost of benefits such as 401(k) matches, PTO accruals, and termination pay.
When considering an incentive plan, employers should be mindful of five things.
Start with a purpose. What business problem, goal, or behavior will be addressed with an incentive plan?
Select key measurements. Keep it simple: the more complex the measurements are, the less impact the incentive plan will have.
Test for desired outcomes. A pilot program for a limited duration will help identify unintended consequences.
Make sure employees understand how the plan works. Provide employees with a detailed explanation of the reasons behind the plan and the impact it is intended to have on them personally.
Consider all the details and put them into a written plan document. Make sure there is clarity on eligibility, funding, funds allocation, how and when payouts are made, and what happens if there is an employee separation or leave. Also, how will communication of the progress toward goals be handled and who takes care of the plan administration?