Variable plans in a Pay for Performance System

by on June 16, 2009 · 0 Comment POSTED IN: HR Info Center

American companies use variable plans in a pay for performance system

So, what’s actually been happening with incentives over the number of years or so? There has been a very clear march toward putting more at-risk for employees in a pay for performance system.

Companies have, whether consciously or unconsciously, they’re moving with that trend as well. So, they’re putting more at-risk. And, this survey by Hewitt, 78% of American companies now use variable plans as part of their pay for performance system.

It used to be that the only people eligible for bonuses were executives. And over the years, the jobs that are available for incentives has gotten lower and lower.

And, the spending on variable pay programs has increased, literally, two percentage points in one year to 11.4% in 2005. Ten years ago, it was probably something like 7% or 8%. Twenty years ago, it was probably around 3%. So, look for that trend to continue as companies put more and more at-risk for the employee.

You think there’s changes going on in the human resource department or other areas of the company. The sales group is changing all the time. They pay mix, the pay mix by – we’re generally talking about the mix between basic salary and incentives to equal total comp. And, that may be different for different jobs. It’s all in the sales area. It’s something called accelerators. At what point do you want to provide maybe some additional incentives for somebody achieving something above and beyond your normal goals?

Thresholds and caps. Thresholds speak to what is the minimum level of performance required, before the pay for performance system goes into effect. And, caps or maximums have to do with, is there a maximum amount that could be earned on a – during a performance period or for a particular account?

And, then, finally, how do we provide upside potential? And, that’s the name of the game in a pay for performance system these days. It’s maybe not even put a maximum on there, but, provides enough upside potential with the possibility of getting there that the sales person feels is motivated to achieve those goals.

Twenty-four percent, though, will have some sort of legal action brought to them, against them in the sales compensation area. And, guess what that area generally has to deal with. It’s generally terminations.

What happens when somebody is terminated. They may have revenue in the pipeline. Do you pay it or not? And, if, you do choose to pay it, do you pay it for six months, do you pay it for a year, et cetera.

So, those kinds of things, the termination clause and any kind of in-sales pay for performance system, you should be sure that you’re on good legal grounds there.

The whole point of all these trends seems to be that more and more will be put at-risk for the employee. They’re going to try to hold salaries back. And, you can see that salary increases, despite the fact that we have approximately a 4.5% unemployment rate across the country.

The salaries have gone up like 3.8% – 3.9% – 4% range, right in there. That’s barely keeping up with the CPI or inflation these days. And, if there’s any change occurring at all that’s probably occurring in the variable cash, on the part of compensation.

Edited Remarks from “Incentive Talk: How to Design an Incentive Plan that Works for – Not Against – Your Company’s Goal” by Rick Olivieri

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