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Many employers face a dilemma. They have kept raises in check out of
economic necessity.
At the same time, locking in higher wages and salaries to prevent attrition
can be unaffordable or futile even if it is affordable. That's where variable pay can fit in.
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In fact, most employers already offer some form of variable pay but do
not think of it as such. A common example is profit-based discretionary 401(k) contribution matches.
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He also lists some of the many forms variable pay can take. Those not specifically designed for senior executives or sales people include:
Profit-sharing plans: Probably the oldest and most common type, these are popular because of their simplicity. Profit-sharing plans usually are most effective in small companies in which "people can relate their performance to the profitability of the organization," Wilson states. Individual bonus plans: Tailored to goals for particular employees. Lots of variations. Goal-sharing/team incentives: Payout is based on the performance of a team, department or facility. Gain-share plans: Typically involve "operational employees" and reward performance levels above a baseline. Their function is similar to profit-sharing plans but rewards are linked to a "direct economic outcome" such as units of output or decreased costs. Project-based incentive plans: As the name suggests, these are based on project-specific metrics, and the program ends when the project is completed. Key-contributor incentive plans: These typically focus on individuals "regarded as special talent to the organization" but still focus on group performance factors. They are often used for new product development teams and technical staff. www.hrp.net
The Right Time? Before trying to craft a variable pay plan, employers need to be sure the time is right and that they are properly equipped to get the results they hope for. Among other issues to consider is whether the employees you want to target with a variable pay plan actually have control over the factors that determine their performance. While no employee or group has total control over all the variables, the greater the control, the greater the impact of variable pay.
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Along similar lines, getting the most out of a variable pay plan requires
having good managers in place who can, among other things, "provide an effective sense of purpose and direction based on the overall objectives of the unit and supported by the incentive plan," Wilson said.
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When no such impediments exist, you can begin designing a variable pay plan. It's a task that cannot be rushed. Wilson has much to say about the topic. Some of the basic steps he recommends include:
1 Define the plan's purpose. What are the key goals? For example, is it
about the company's financial performance? Attracting or retaining talent? Boosting output? All of the above? In what order of priority?
2 Establish benchmarks. Your instinct might be to use performance
measures that you already have in place. But Wilson suggests taking a fresh approach, look at what your customers want from the company, then "establish measures that reflect these factors.
3 Set the payout mechanism. This requires, among other considerations,
allowing employees to see a direct relationship between their performance and their variable reward, making goals challenging yet achievable, and making the timing tight enough that employees can stay focused on the goal.
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