Variable Pay: Recognising good work

Some leaders believe that introducing an incentive scheme will enhance company performance. But experience suggests that the solution isn’t so clear-cut. John McGill examines the myths and fears around variable pay and provides some guidelines.

As remuneration and reward specialists, we are often asked by organisations to design incentive schemes that will remedy performance issues. We advocate that carefully designed and implemented variable pay schemes can improve workforce productivity. 

But it is important to understand that incentive pay alone will not guarantee business success or drive all behavioural change desired.

In fact, there are a number of things variable pay does not do and many challengers use these misconceptions as reasons why incentive schemes don’t work.

For example, don’t attempt to introduce incentive pay as a measure to shore up structural deficiencies, poor morale or bad client relationships as it is unlikely to address the underlying issues.

Incentive pay systems work well within a sound organisational structure where they can reinforce the link between sound financial results and individual reward, but they are not a cure-all solution.

So why and when should New Zealand organisations consider variable pay? In these times of relatively low salary movements variable pay can be used as the tool to reward performance.

When exploring an incentive scheme I like to start with a good solid basis for developing a variable pay component. In my experience this this based on two thoughts:

1. Incentive pay is about rewarding good organisation outcomes with a financial reward. Except in specialised roles, it is not about motivation.  

2. With a deeply embedded entitlement culture in New Zealand, having a variable component to pay adds a refreshing reality check as to how an organisation works. The vast majority of organisations do not have guaranteed revenue flows year in, year out as unfortunately markets, products and services change and organisation structures can get out of alignment.

Fair and equal
On the basis of these ideas we see another perspective of who should get a share of an incentive scheme and just how much of it. The first point is relevant to many debates around pay and pay structures. I suggest everyone within an organisation should have incentive pay in some form as part of their remuneration and every type of organisation should, at the very least, look at how it could be part of their pay structures. I see no reason why public sector organisations, that currently use it very sparingly, should not include variable pay, although I acknowledge it may take time to shift mind-sets before this idea is accepted.

What about those on low salaries where the majority of their income is already spent? Not an issue from my perspective. Introducing variable pay does not reduce fixed pay or remove  an organisation’s systems around increases, rather it gives employees the opportunity to share in the organisation’s success. 

More seriously it is a way in which organisations can look at increasing pay at the lower levels in a manner not usually considered which can, in fact, be more affordable than the fixed pay increases that also occur.

Would employers not abuse such a system? Some, I am sure, would argue this. If an employer is looking to rort the system and in some manner be disingenuous in the introduction of such a system that would defeat the purpose of it entirely. 

Such employers, I would suggest, would be merely adding to the likely list of poor systems and procedures they already have rather than looking at efficient and productive ways to enhance organisation and individual performance.

Good employers, particularly those with good performance management systems, will be most capable of introducing such systems of variable pay and will, I suggest, reap the rewards. In short, monetary incentives alone do not motivate people. Unfulfilling work, no matter how well it is rewarded, will not drive future business success. 

Furthermore, the need to manage, coach and develop employees remains integral in keeping a workforce engaged and the addition of an incentive plan is no substitute for performance development. However, when used correctly incentive pay systems encourage and reward high performance and support business strategy and success.  



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