More employers are using variable pay to reward and motivate employees. Companies are getting creative with the type of rewards they are offering. Some are offering products as a reward. Others are using extra time off as the reward for good performance, even going so far as to close down an office or a manufacturing plant completely if a group meets its targets.
At least 80% of organizations offered a variable pay program last year, with company spending on variable pay as a percentage of payroll at 11.2%. About 45% of employers use spot bonuses, while 20% use group incentives and 18% offer a bonus at a milestone, such as a project completion.
Variable pay plans clearly connect employees to company performance. These plans can be directly linked to any factor that is important to the company like sales, customer service ratings, Web traffic, or any other quantifiable factor.
Unions used to oppose variable pay programs but their mindset is gradually changing.
These programs do have their potential downsides. The biggest challenge comes when a company does not meet its goals, even when employees have worked hard and put in tremendous effort. The program could also cost more than anticipated, and employers could face discrimination lawsuits if they favor certain groups.
American Express is an example of a company that successfully uses all kinds of variable pay programs, including management bonuses, sales incentives, spot bonuses, and other informal rewards. Some high performers make as much as three times that of a regular employee.
Jose Irizarry, vice president of compensation for American Express says that the performance-based pay programs have been very successful. American Express has a high rate of retention for top performers. The company often adjusts goals mid-stream if there are unexpected external factors at work that affect results.
The best programs are those that have objective measures and clear goals. Rewards also should be meaningful enough to spark behavior change. The amount needed to motivate could vary for different groups based on age, income, and job responsibilities. Senior managers also need to support the program for the program to really take hold.