- Organizations that have implemented nonlinear variable compensation plans are vulnerable to employees taking advantage of the scheme through gaming and target negotiations.
- As a result, these plans often cost the organization more than they are worth, leading to underperformance or lost opportunities that affect the organization’s bottom line.
- Developing a nonlinear compensation plan complex enough to eliminate employee manipulation while still ensuring that targets are met and organizational value is created can be extremely difficult and time consuming.
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Our Advice
Critical Insight
- The multitude of fixed targets baked into nonlinear plans incent people to “game the system” to achieve optimum payouts for themselves, regardless of the best course of action for the company.
- To limit this manipulation, organizations should opt for linear variable compensation plans; the absence of rate jump points decreases the incentive to manipulate outcomes.
- Often, organizations with nonlinear plans involve management/executive employees in target setting for their employee group; they are trusted to know when rate jump points are warranted. The problem with this practice is that these employees have a vested interest in the outcome and are therefore inclined to soften targets, causing lengthy debate.
- To eliminate these seemingly endless debates, organizations should opt for a linear plan that eliminates discussions around reasonable rate jump points.
Impact and Result
- Optimized employee motivation. The easier it is for employees to understand a plan and calculate payout, the greater the plan’s motivational effect.
- Reduced administrative burden. The easier it is for plan administrators to calculate payout, the less resource time required to perform calculations.
- Reduced communication requirements. The easier it is for employees to understand a plan, the less time required to explain it – both initially and on an ongoing basis.