Create a Variable Compensation Plan
Guide the design and administration of variable compensation programs with a comprehensive variable compensation plan.
- Organizations need to avoid unaffordable outlays in turbulent times, yet incentivize behaviors that lead to increased profitability. Striking the right balance between cost control and ongoing competitiveness is difficult.
- There are so many variables that affect the suitability of variable compensation plans that it’s difficult to know what effect each should have on plan selection and design.
- Without a variable compensation policy to steer their decisions, organizational leaders often make unguided compensation decisions which can lead to real or perceived inequity. This can lead to a variety of negative outcomes, including lower productivity due to disengagement and even costly lawsuits.
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Our Advice
Critical Insight
- Business strategy, business lifecycle, culture, industry, workforce composition and demographics, laws and regulations, organizational suitability, and employee segment suitability should all be taken into consideration when selecting and designing plans.
- Having payout floors and ceilings is acceptable, as long as 95% of performance outcomes fall within the normal range; otherwise, they can act as strong incentives for employees to act in ways that strip business value (i.e. “gaming”).
- Budgets/targets should never be linked to compensation and/or non-monetary rewards (e.g. promotions, public accolades) because it creates a strong incentive for employees to set artificially low targets (i.e. “sandbagging”) and/or lie about their actions or performance. Either way, corporate value is eroded.
- All payout designs (linear, stepped, and curvilinear) are appropriate for all employee segments under different circumstances, with the notable exception of executives. Executives should always be on a linear payout scheme because the incentive for gaming is high on stepped and curvilinear plans.
Impact and Result
- Develop a clearly-articulated variable compensation plan that accurately reflects the organization’s true approach to compensation decision-making and practice.
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Unlock Sample ResearchContributors
- McLean & Company conducted an extensive HR benchmarking survey, which captured responses on candidate sourcing strategies and trends from over 500 HR and IT professionals, between June 2011 and present day.
- McLean & Company conducted a variable compensation planning survey that captured responses on current practices and trends from approximately 42 HR and IT professionals in October 2012.
- McLean & Company conducted four interviews with thought leaders and HR practitioners between October and November 2012.