What is Variable Pay Program?

Learn about Variable Pay with Julia Robert!
Erin Brockovich 2000


Case breakdown: Movie Erin Brockovich

The scene that you just saw shows Erin, shouting at her boss assuming she won’t be getting the bonus that they had discussed. She feels miserable as she had worked very hard on the case. The scene is funny as her boss had given her a bonus of $ 2 million and she is dumbfounded when she sees the amount on the cheque.

What is Variable Pay program?

Bonuses, profit-sharing, incentives and gain-sharing are all part of variable pay program. These are different from traditional salary that an employee receives. It is based on the performance of the employee, similar to what we saw in the scene. With Variable pay, as the name suggests it is variable in nature not fixed. That means it fluctuates up and down with the measure of performance.

Low performers in an organization, find over a period of time, their pay stagnates while a high performer enjoy pay increases commensurate with their contribution.

Bonuses can be paid exclusively to executives or to all employees. For instance, annual bonuses in million of dollars is not uncommon in American organizations. Increasingly, bonus plan are taking on a larger net within organizations to include lower ranking employees. Many companies now routinely reward production employees with bonuses in the thousands of dollars when the company’s profit improve.

Profit-sharing plans are organization wide programs that distribute compensation based on some established formula. These can be direct cash outlays or particularly in case of top managers, allocated as stock options.

A formula based incentive plan is the gain-sharing plan. Improvements in group productivity from one period to another determine the total amount of money that is to be allocated. Gain-sharing has been found to improve productivity in a majority of cases and often has a positive impact on employee attitudes.

Written by: Ms. Gitika Chandra


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