What is Variable Pay Program?

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.

Learning Perspectives blog will explore the meaning of the Variable pay program.

What is Variable Pay program?

Bonuses, profit-sharing, incentives, and gain-sharing are all part of the variable pay program. These are different from the traditional salary that an employee receives. It is based on the performance of the employee, similar to what we saw in the scene. Variable pay, as the name suggests 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 high performers enjoy pay increases commensurate with their contribution.

Bonus

Bonuses can be paid exclusively to executives or to all employees. For instance, annual bonuses of millions of dollars are not uncommon in American organizations. Increasingly, bonus plans 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 improves.

Profit-sharing plans

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

Gain-sharing Plans

A formula-based incentive plan is a 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.

Understand Variable Pay structure with a Video