Variable pay
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The document discusses variable pay, including: - Variable pay aims to reward employees for objectives and results beyond regular job responsibilities, while fixed pay compensates for day-to-day work. - There are three categories of variable pay: incentives, bonuses, and recognition. Incentives are tied to pre-determined criteria while bonuses are for completing specific tasks. Recognition is more subjective. - An effective variable pay program is linked to business objectives, has clear purposes and performance measures, and considers factors like eligibility, funding, and implementation. - In India, the ratio of fixed to variable pay is shifting, with variable pay expected to increase to 25-30% on average from the previous 10-
Variable pay
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- 6. 6W of Variable Pay will be discussed…
- 8. Difference Between Variable Payment and Fixed Payment
- 9. Fixed Pay Variable Pay Orientated to compensate for day to day responsibilities and ongoing performance Recognizes long-term contribution Factors in Skill/Competency development Aimed at rewarding special objectives and results ( e.g. increased productivity, cost reduction) Rewarded for “Above and Beyond” expected, regular contributions Drives strategic innovations
- 10. Basic Concept of Variable Pay Characteristics of Variable Pay Payouts typically in lump sum cash or stock- related awards Does not permanently increase fixed salary, but may be included in benefits determination Must be re-earned each year Typically includes participation of a large segment of the employee population below the executive level
- 11. Three Categories of Variable Pay Incentives Bonus Recognition Criteria determined in advance Completion of a specific task Criteria broadly defined and subjective Amount of payment can vary Monetary or non- monetary Self-funded or budgeted Nondiscretionary Amount determined in advance Monetary Budgeted Nondiscretionary Awarded spontaneously Decision made after the fact Focused on behaviors Monetary or Nonmonetary Criteria determined in advance Completion of a specific task Budgeted Amount of payment can vary Monetary or non- monetary Self-funded or budgeted Nondiscretionary Amount determined in advance Monetary Budgeted Nondiscretionary Discretionary Criteria determined in advance Completion of a specific task Criteria broadly defined and subjective Amount of payment can vary Monetary or non- monetary Self-funded or budgeted Amount determined in advance Monetary Budgeted Nondiscretionary Awarded spontaneously Decision made after the fact Focused on behaviors
- 12. Bonus Plan Types Referral bonus Hiring (sign-on) bonus Retention (stay) bonus Project completion bonus
- 13. Significance of variable pay in compensation Management • Progressive organizations are seeking alternative pay methods to both maintain cost controls on overall compensation expenses and increase employee performance and productivity. • One possible alternative is variable pay for performance, a method of paying employees for successful attainment of specific sales performance objectives. • Variable pay design can include incentives for achievement based on individual performance, group performance and/ or company performance.
- 14. Five conditions indicate a need and environment where incentive programs work best Current performance on specific work goals is inadequate. The cause of the inadequate performance is motivational (rather than due only to a lack of knowledge and skill or to environmental barriers). The desired performance type and level can be quantified (how much, how often, how many). The goal is challenging yet achievable (easy goals are not appropriate). The organization requires that all other performance goals continue to be achieved at or above current levels.
- 15. Linking Variable Pay to Business Objectives Desired Business Goals→ Business Strategy→ Staffing/Org. Requirement→HR Strategy→ Total Rewards Plan→Variable Pay • “The society has similar companies which employ similar workers, who have a similar educational background. They do a similar kind of work, have a similar way of thinking, a similar price and quality, create similar products and do similar things.”
- 16. Threshold Growth Maturity Decline High Total Fixed Pay STI(Sho rt term Investm ent) STI, LTI(Short and long term investment) STI(Short term Investment) Medium Short Term Investment TFP(Tot al Fixed Pay) TFP(Total Fixed Pay) LTI(Long term Investment) Low Long Term Investment LTI(Lon g term Investm ent) TFP(Total Fixed Pay) Variable Pay helps to achieve Business Objectives Focus, Alignment, Motivation, Reinforcement.
- 19. Purpose & Objectives Performance Measures Award/Payout Mechanism & Opportunity Eligibility & Participation Funding & ROI/ROE Program Implementation Special Issues for the Program to Address Program Management & Assessment Elements in the Design of Variable Pay Programs:
- 20. Pre-Design • Ÿ Considering internal and external factors • Ÿ Obtaining management support • Ÿ Identifying the design team Phase 1
- 21. Internal Factors • Ÿ Organizational readiness • Ÿ Costs/resource availability • Ÿ Timing
- 22. External Factors • Ÿ Labor market • Ÿ Competition • Ÿ Geopolitical • Ÿ Legal/regulatory • Ÿ Technology
- 23. Variable Pay Effectiveness Model
- 24. Issues to Consider • Is the organization ready for a new or revised variable pay program? Costs/Resource Availability • Ÿ Implementation costs • Ÿ Funding • Ÿ Compliance • Ÿ Support staff External Factors • Ÿ Labor market • Ÿ Competition • Ÿ Geopolitical • Ÿ Technology • Ÿ Legal/regulatory
- 25. Obtaining Management Support • Ÿ Determine buy-in early • Ÿ Begin at a high level • Ÿ Utilize allies Identifying the Design Team • Ÿ Considerations for an in-house design team • Ÿ Advisory group alternative
- 26. Phase 2 Design • Ÿ Determining plan objectives and plan type • Ÿ Defining eligibility • Ÿ Selecting performance measures Determining Plan Objectives and Plan Type • Ÿ Directly address business objectives • Ÿ Limit the number of objectives • Ÿ Use SMART objectives • Ÿ Select a plan type that supports objectives • Ÿ Examples
- 27. Defining Eligibility • Ÿ Level at which performance is measured • Ÿ Participant line of sight • Nonparticipants • Ÿ Individual criteria Level at Which Performance Is Measured • Ÿ Organization wide • Ÿ Organizational unit • Ÿ Team • Ÿ Individual
- 28. Participant Line of Sight • Ÿ Employee’s perception of influence • Ÿ Short line of sight vs. long line of sight • Ÿ Employee/management Selecting Performance Measures • Ÿ Identify performance drivers • Ÿ Establish performance measures • Ÿ Determine if there are single or multiple measures
- 29. Quantitative Measures Financial • Ÿ Volume/profit • Ÿ Aggregate/end-result level • Ÿ Limited interim process feedback • Ÿ Strong indicator of past performance Operational • Ÿ Day-to-day data • Ÿ Measure effectiveness • Ÿ Identify key processes • Ÿ Reflect value to customer
- 30. Overview of the Key Decisions for Long-term Incentive Compensation Plan Purpose & Objectives (Why) Overall Approach (How) Award Guidelines& Opportunity (How Much) Eligibility (Who) Source of shares, Vesting, Liquidity & Tax Treatment Program Implementation Special Issues, Terms and Conditions Program Management & Assessment Long-term Incentive Plan
- 31. # of Units x $ Value of Units = LTI Payout $$$ Long-term Incentive Plan The program will exist for the term of the expansion project and may be renewed or modified based on business conditions and strategic imperatives. This is estimated to be 5 years. The company will establish key goals and milestones associated with the expansion plans and award individuals “units” based on the achievement of these goals. This will be done on an annual basis. The units will be valued based on the successful completion of the expansion plan and the successful performance of the company. The units will be valued at the end of the performance period. At the completion of this performance period (as defined by the expansion project plan and approved by the Board), the eligible individuals will receive the LTI payout awards.
- 32. Program Duration The longer the incentive program’ s duration, the greater the impact: Short-term programs of one week or less yielded a 20% performance increase. Six-month (or fewer) programs yielded an average 29% increase. Programs extending beyond one year produced an average 44% gain.
- 33. Realigning Fixed and variable pay in compensation structure:Indian Scenario According to hiring major ‘Ma Foi management consultants,’ the variable pay component in India is likely to go up to 25-30 percent on an average from 10-15 percent. The ratio of fixed to variable pay in compensation structure, depends on the level of the employee in an organization, the responsibility attached to the job and the role an employee plays.
- 34. The new economy sectors like IT, banking, insurance and back-office jobs where employees engaged in sales activities, usually have a larger variable pay than the employees in execution roles. After the recession, the traditional or old economy sectors like manufacturing and oil and gas too have started changing their pay structure from the earlier 100 percent fixed format to mix of fixed and variable pay. Hewitt Associates, conducted ‘14th annual Salary Increase Survey’ in March 2010 covering 465 Indian firms across 20 primary industries and 27 sub-industries. According to the survey variable pay as par t of total compensation continues to grow with executive getting 24.8 percent and lowest rung officer cadre getting 11.3 percent of their salary in variable compensation.
- 35. What will be the ideal range of Fixed and Variable pay in total salary ? • Average Remuneration Break-up: Fixed-62% Varable-38%
- 36. Ratio of Variable Pay