Recognize and Prevent Potential Pitfalls in Your Variable Pay Program
According to a WorldatWork survey, 84% of organizations relied on variable pay for employees in 2021. Now, with skyrocketing salary expectations across the workforce, many organizations have determined that the best way to battle pay compression is to offer more variable comp opportunities.
Is your organization considering an expansion or significant update to your variable compensation practices? Make sure you get the most from your program by structuring it the right way.
Warning: Variable Pay Can Have Complex Effects
Variable comp programs can act in surprising ways. Well-crafted programs can motivate employees and spur productivity, but poorly crafted ones can result in burnout. Carefully considered payments can make workers happier, but poorly crafted ones can decrease job satisfaction.
We’ll spend the next few blogs discussing the various ins and outs of variable compensation programs and how they can impact your workforce. However, if you’re planning to launch a variable comp program soon, we recommend that you check, double-check, and triple-check your program first.
Here’s what you should keep an eye out for.
The 5 Areas to Consider When Planning Your Variable Comp Program
One of the biggest potential pitfalls of any variable comp program lies in the fact that measurable goals are not always worthwhile goals. Sure, tidy measurements can be extremely appealing, but the easiest tasks to measure are not always the most valuable tasks to accomplish.
For example, the length of this article is easy to measure (987 words), but our goal in writing it wasn’t to publish a lengthy article. The goal was to help you out by providing useful tips for crafting a successful variable pay program. A long article is more likely to achieve that goal of course, but it certainly isn’t guaranteed. It took time for us to dig deeper and figure out alternate metrics that better aligned with our objectives.
Therefore, our top tip is to:
- Ensure that any KPIs you tie to your variable pay accurately reflect your company’s overall goals, and that they are not just measuring what you assume can serve as a proxy to those goals.
Whatever you do: don’t make the mistake that Wells Fargo did when they tied employee performance evaluations and pay to account openings.
In that chilling cautionary tale, employees were rewarded based on the number of new accounts they opened. To boost their measurements, some staff members chose to move small amounts of existing customer deposits into new accounts under the customer’s name. Then they would close the new account and transfer the money back into the original account later. While this practice helped Wells Fargo team members meet their sales quotas, it annoyed customers and did absolutely nothing to further the bank’s underlying strategic goal of increasing new customer accounts.
Yes, the employees engaged in reprehensible, fraudulent behavior to “earn” their incentive-based pay, but the whole issue could have been avoided had Wells Fargo leaders taken the time to identify better ways to measure for their real goals.
Aside from checking that your measurements accurately reflect your goals, you should also:
- Check that stated incentives are easy to understand and are achievable, so you don’t run into any misunderstandings down the road.
Example: If you are offering higher payouts to salespeople who break into new geographies, make sure to be clear whether those margins apply to new geographies for the salesperson or new geographies for the company. Then, make sure the salespeople have the tools they need to accomplish that.
- Ask good questions, so you can make sure your company goals and variable comp programs align with personal or departmental goals.
This is specifically important in cases where a long-term company goal may conflict with a department or individual’s opportunities for growth. For example, perhaps you offer a sizeable performance bonus to your product management department leader for a new product rollout that will take 4 years to finish. Unknown to you, the department leader has planned to continue her career trajectory by moving up and out of that department within 2 years. That situation will lead to a conflict, but asking questions can avoid that.
- Verify that all variable comp programs you put in place, even short-term ones, promote sustainable, long-term behavior among your staff.
This comes up most often when your variable pay is based on an outcome, such as selling X quantity by Y date (as many quotas are), which can result in ebbs and flows in performance. If salespeople aren’t near the goal, or have already surpassed it, they may stop trying. Alternatively, if your variable compensation program is based on long-term, sustainable behaviors, such as following up on new leads within X number of hours, it will build a habit that should result in more sales consistently over time.
- Ensure that your programs are fair and equitable.
One good way to measure this is to use the “printer test.” Ask yourself: “If an unsuspecting employee discovered a copy of the variable compensation program in the office printer, would it pass the fairness test?” If not, make sure you update that program immediately.
Bonus Tip: Choose a Solution That Lets You Set Up Your Variable Comp Program Your Way
One fact about variable comp programs is that they have to be tailored to each company, each department, and to each individual. There is no “one size fits all” for variable comp programs.
That’s why our bonus tip for this article is to make sure you use a variable comp management solution that can handle anything.
Commission Plan for Microsoft Dynamics GP is so flexible and easy to use that it makes it easy for you to adjust or completely change your variable pay programs whenever you wish, so you can tailor your plans to your company’s and employees’ precise needs.
If you would like to learn more about Commission Plan, please reach out at your convenience.
Contact EthoTech to Learn More
Since 2002, companies across every sector have relied on EthoTech for the right tool for tracking, calculating, and paying variable compensation. We provide solutions, integration, and support that is focused solely on integrated variable compensation software for Microsoft Dynamics GP. It’s all we do, and we do it better than anyone. Contact EthoTech to learn more.
Read the 2nd article in this series:
The Surprising Ways Variable Comp Affects Motivation