As many companies pay out bonuses in March, it’s a worthy time for Human Resources professionals to look at how to make the most of their variable compensation plans.

Variable compensation is how you structure base pay plus any additional compensation including bonus. More and more, variable compensation is used to attract and retain the best talent at every level.

The role of variable compensation should achieve the following:

  • Improve performance
  • Ensure company goals are known by all
  • Share in success
  • Motivate desirable behaviors
  • Improve retention
  • Create focus on desired results

The Basics

To be effective, there must be common company goals with clear links to how each individual role aligns with company performance. As a first step, create measurable job descriptions before reviewing your compensation plans. People want to know what the company means to achieve, and how their job function can help the company meet that goal. Compensation plans must have clearly defined measurements of the business and the ways in which they can contribute to their earnings.

Variable compensation plans should be inclusive, whenever possible. The targets should be competitive, so there are reach goals within the plan. Targets should stretch each employee to perform beyond their daily routine, while still realistic and reflective of the culture. Communication is key and training managers to understand the plan to share with their employees is critical to plan success. Be sure any plan is not overly complicated to administer. When it comes time to measure and pay bonuses, there should not be an undue burden on finance and payroll to calculate the variable pay feature per employee.

Be Inclusive!

Historically, such plans have only included senior leaders and not only does this disenfranchise the managers and employees, but it only achieves the result of paying out top-line profits, and tends to be subjective. When variable comp plans are as inclusive as possible, it increases the discretionary effort and the business results. The more people who participate, and understand how they will benefit from putting in that effort, the more chances you have of great financial results. This is how you can really amp up motivating your workforce, in concert with your culture, engagement, and L&D programs.

Maximize Your Compensation Programs

Additional talent benching programs can be put in place to identify your rising stars and career path those who show potential in areas that can strengthen business units. Match your rising stars with programs that will help them meet their professional and business goals while they are participating in variable comp. This will further strengthen your compensation programs, as well as goal achievement, retention, and engagement. has a lot of information on the 9-box grid which can be used for talent benching and succession planning. SHRM article on 9-box methodology

Maximizing variable compensation programs also is dependent on total rewards and recognition programs. If the only time you reward your employees is at bonus time, you are missing opportunities to motivate and recognize KPIs (key performance indicators). Strong incremental performance should be recognized to reinforce overall momentum in driving individual and team performance. Having reward and recognition programs in place, which are manager and often peer-driven, also drives a culture of performance and connectivity.

Ways to Structure Variable Compensation Plans

Variable compensation plans need structure. Discretionary plans designed without much planning or thought, and without constant monitoring, could lead to employees manipulating the system. Structured plans such as a balanced scorecard, where you create practice or unit scorecards for each level based on four performance categories: financial, customer, internal process, and organizational goals can be funded by the year-end company profits. There are modified and hybrid plans that fit many private and public companies to include many variables inclusive of stock awards and other compensation tools. Your incentive targets can vary by level in the company.  Senior roles should have higher incentive targets for practice or business unit results than those in entry to mid-level. Ask yourself the following questions when designing a variable compensation plan:

  • How does your annual incentive plan compare to your competitors?
  • How can you modify your incentive plan to make it more effective for everyone?
  • How can you show that your plan supports your business objectives?
  • How will your plan improve your ability to be competitive in the marketplace?
  • Will your plan be flexible as your business continues to evolve over the next 3-5 years?

Human Resources professionals designing these plans have many resources, including peer HR pros. Variable compensation when done right provides a more equitable bonus award based on direct efforts and performance. It can foster an open collaborative and high-performance environment, and improve business results.