Friday, August, 17 2012
According to the latest Hay Group research into projected 2013 salary increases, median increases of 3% will be consistent with the prior two years experience. This is in line with an AonHewitt study projecting 2013 increases also at 3%. Paradoxically, the AonHewitt survey found that employers are planning to spend upwards of 12% for “variable” pay for Salaried Exempt and 6% for Salaried Non-Exempt, 2 to 4 times what is spent on base pay increases. Employers have increasingly redirected monies from base pay adjustments to focus those dollars on their high performers and top producers. Additionally, variable pay allows employers to target specific projects or assignments and better direct the performance of individuals without increasing the underlying base pay structure.
Although not a new concept, variable pay is being used by organizations to attract, retain, and motivate top talent in an era of 2%-3% salary increase budgets. A simple example is the project manager who completes the project on-time, under budget, and to specification. The project manager is paid a flat fixed (lump-sum) dollar amount in recognition of the achievement. Under a traditional pay system, the project manager might have gotten a percentage increase at their next scheduled review in 6-9 months or a year which built on top of their existing base salary. Over time, these repeated percentage increases over the employee’s career compound until the organization is paying 50%, 75% or even 100% above market price for a project manager.
The value of variable pay, aka “pay for performance”, is the fact that it does not inflate calculations in salary based benefits such as life insurance, paid time off, STD/LTD replacement pay, pension and savings plans. Since traditional pay add-ons to base salary compound over time, so would those add-ons compound anything tied to base pay. In fact, the employer would be paying multiple times for the same performance. While our project manager did a great job on the last project, that same employee is now performing poorly on the current project. Thus the organization could find itself paying for top performance based on prior efforts but receiving only lack luster results on the current assignment if compensation were based on a traditional pay system. Properly designed, a variable pay approach clearly defines what performance level has to be achieved and what the reward is if it does.
Variable pay is one many forms of incentive pay and may be found alongside other pay practices within the same organizational unit. At one time, the former Florida Steel Corporation, now Gerdau S.A. had a variable pay plan which rewarded ALL workers for returning the mill to production status as soon as possible during its annual maintenance shutdowns. This included office workers who would do whatever was required to support the maintenance work and getting the mill back into production. As part of the plan, management clearly communicated to all employees the need to have the mill on shutdown for the minimum amount of time.
Variable pay can work in any organizational setting and with any occupational role; from the shop room to the boardroom, variable pay has the ability to focus and drive employees to the organization’s desired outcomes. The key, as with any compensation system, is its design, transparency, and administration.
