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Variable Compensation: Putting Some Skin in the Game

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Chris Caldon
on December 13, 2012

Are performance-based bonuses a good way to increase employee engagement and drive higher performance? With salary increases expected to stay flat in 2013, many organizations are embracing variable compensation programs to recognize and reward the workforce for contributions to organizational success. According to a study by WorldAtWork, variable pay was used by 82 percent of employers this year, up from 79 percent last year.

Variable compensation programs are attractive in an uncertain economy because they allow organizations toreward high performance without increasing fixed costs. When employees perform well or their division or the organization meets its goals, bonuses, incentives, spot pay or other rewards can be included as part of the compensation strategy.

However, to be effective, organizations need to ensure that they are truly rewarding high performance and that compensation decisions are equitable. Asking employees to put some skin in the game by tying performance to rewards as a motivation and engagement strategy requires transparent processes and technology support to help managers ensure the right people are being rewarded.

The right technology can also help managers and employees have conversations that help employees better understand the connection between rewards and performance. When employees understand what is expected of them, as well as the associated rewards, organizations can drive more value from their compensation program.

How can you optimize variable compensation programs?

Stop making performance management an annual event – Frequent, ongoing performance and compensation discussions help employees understand what is expected of them, where they need to improve or what they need to achieve to earn a reward. Periodic and frequent performance conversations eliminate end of year surprises and can keep employees focused on goals that align with business priorities.

Put data at employees’ and managers’ fingertips – Ask people what they did last year and the standard answer may be “I can’t even remember what I had for lunch.” Make it easy for both parties to document progress for more productive performance conversations.

Be consistent – How is high performance defined? How are contributions tied to rewards? Are rewards fairly awarded across the organization? Compensation software can help standardize rules and processes to ensure equitable decisions. Ensuring the decision-making process is fair can positively impact employees and keep morale elevated.

Integrate talent management processes – Compensation and performance should be integrated to work seamlessly. Compensation planning solutions ensure that rewards are calculated correctly, and when integrated with the performance management system, it empowers managers to think strategically about people, performance and pay.

While money isn’t the sole motivator for performance, being recognized for a job well done has merits that payoff. When employees understand what is expected of them, are motivated to achieve, and feel valued by the organization, organizations benefit through higher performance and increased retention. At a time when budgets remain tight, exploring variable pay programs and supporting them with the right technology can help organizations increase effectiveness of the compensation program and recognize those individuals making the biggest contribution to business success.

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