Variable compensation is part of a company's tools to meet the salary expectations of its employees. An overview of the approach that has recently been discussed in a Quebec HR Congress.
According to a Quebec Statistics Institute study on variable compensation in organizations with at least 200 employees, as many as three out of four companies in Quebec favour this salary strategy. Furthermore, almost half of Quebec employees working in organizations of this size that have access to such a plan.
This type of compensation can take several forms: short or long-term bonuses, commissions, individual or group awards, profit sharing, productivity gains, etc.
This method has two main objectives. On the one hand, it encourages employees to work together towards an identical goal and give the best of themselves to their jobs. Moreover, it is a good way to control payroll costs.
Compensation as financial and individual leverage
Companies that do not operate with variable compensation plans often offer higher base salaries to compete with those offering other forms of income on the market. “When faced with financial difficulties, these organizations do not benefit from payroll flexibility and sometimes need to lay off employees to adjust their budgets rather than cut bonuses at the end of the year” says Geneviève Cloutier, compensation associate at Normandin Beaudry.
The structure must be carefully selected according to the goals you wish to achieve. “It is not about establishing a variable compensation plan based on short-term financial objectives, rather, it is important to consider larger scale projects such as innovation, research and development,” she states.
Companies are more likely to offer this type of compensation to senior management, managers and professionals since they have some decision-making authority. But that does not mean that the support staff or the junior level professionals have no role to play in achieving an organization's objectives. It depends on the philosophy you advocate.
It is important to diversify the types of compensations you offer, including many that will be paid as short and long-term bonuses to avoid deviant behaviour. “A leader who gets 45% of his base salary in the form of short-term bonuses could make decisions that have long-term advantages for the business,” says Cloutier.
Similarly, an incentive plan should not only focus on a division of the company, but take into account all contributing groups. “A kind of equalization system should be put in place to avoid a particular division receiving the bonus in its entirety,” she says. The higher up in the organizational structure, the more group goals you should expect, while further down, the compensation plan should have a personal aim.
Finally, efforts to ensure that all employees are rowing in the same direction will be in vain if the incentive plan is not well understood. This understanding starts with good communication from the human resources department, but also from managers to their employees. “If the method of calculating a bonus is complex, employees may not be aware of what they need to do to get it,” says Cloutier.
When it is well done, a variable compensation plan can really make a difference in achieving financial results, but also on the individual level. Otherwise, the incentive loses its desired effect.