Variable Pay V/s Incentive Scheme

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Earlier Incentives were predominant and effective motivational tools for sales, marketing or related profiles where the performance can be measured in numbers (invoicing/ order booking/ Profit/ discounts etc.), but to motivate the other profile where performance measurement was not as easy in comparison to the sales and marketing profile, different parameters needed to be searched and evaluated.

Thanks to scholars who, with new innovative thinking found the way of measuring the performance of almost every profile of the universe and finally it has become possible to create an incentive scheme in respect to every profile.

With the emergence of ‘Cost Center Approach’ in HR, every single penny earned by the employee is considered as a part of his / her CTC and to ensure the accuracy in budgeting / cost, the concept of variable pay introduced. Yes the variable pay always linked with the various performance parameters just like incentive schemes.

The HR professionals of organizations where financial payout scheme is under planning stage always find themselves under dilemma for which option to opt out of ‘Incentive’ of ‘Variable Pay’.

 As per Wikipedia: An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time.

LET’S COMPARE BOTH THE MODELS: Incentive Schemes V/s Variable Component

Flexibility: Normally incentive schemes are designed department wise, grade wise or area wise and are mostly based on individual performance (sometimes certain portion may be linked with branch/ unit/ regional performance as well) whereas variable pay normally linked propositionally with Universal performance/ Continental Performance/ Country Performance/ Regional Performance/ Branch Performance/ Departmental Performance and lastly individual performance (very less portion).

Incentive Schemes are more focused on individual performance whereas Variable pay system is more focused on the overall performance of the organization.

Incentive schemes cover all employees in range (as per incentive policy), whereas variable pay can be for selective employees and hence provides organization a flexibility to apply for needed employee segment.

The individual performers find the Incentive schemes more attractive as they earn the incentive based on their individual performance rather than depending on the performance of the universe. With incentive schemes, Organizations sometimes find it difficult to safeguard their interest if the individuals earn the incentives irrespective of Organization performance and hence to protect the same the organization applies certain qualifying gates in such schemes.

Disbursement Period Flexibility: Incentive schemes can be designed with the disbursement policy on monthly, quarterly, by- annually or annually whereas with variable pay, annual disbursement is the best suited situation as the organization need to verify the performance from top to bottom i.e. from Universe to Individual performance which is normally not possible with the frequency of monthly or quarterly.

Scheme Period Flexibility: The incentive schemes can be designed for first/ second half or for any quarter of the financial year, which is somehow not possible in variable pay system. Variable pay normally is a part of CTC and remains applicable from the date of joining of the candidate.

Amount Flexibility: Incentive schemes are the schemes that can be different every year, employees can not consider the scheme amount as their right and it is possible to increase/ decrease the incentive amount whereas it is not possible with the variable pay and normally employees consider the variable pay as their right (normally mentioned in their respective CTC structure).

Product Focus: The incentive scheme can be launched for one product/ product range to promote that particular product/ product range, possibly this is also not feasible with variable pay system.

Appraisal Safe: The best part with the Incentives are that the (amount) are not a part of employee’s CTC, hence remain apart while performing appraisals and hence not contribute to the compound increase of CTC like in variable pay system.

Denial Safe: To deny the Variable pay, organization have to declare their performance till bottom of the organization which may create a negative feelings among the employees whereas with the incentive scheme having pulses of the external environment the parameter can be set higher so that only the best employees can achieve the incentive without putting any additional financial burden on the origination and of course no need to reveal the financial data to the bottom of the organization.

Transparency: This is the best part of incentive scheme, that it is 100% transparent and communicable from top to bottom, the employees can calculate what they are going to earn whereas in variable pay system employees normally are not aware of the evaluation policy and are not able to calculate the same, most of the time completely blind about the calculations.

With the emergence of various mobile apps, CRM and other software now an employee get the information and visuals on real time basis on their incentive earning part.

Rewards and recognitions are the natural tool for Gamification as a part of employee engagement activities and the organization can easily add the incentive visuals as well for the same.

Attrition/ Retention: Variable pay model helps employees to negotiate on total CTC inclusive of variable pay with the organizations not having variable pay model and hence get higher % of hike during CTC negotiation in comparison to the employees not having variable pay in his/ her CTC. Incentive scheme normally do not allow such advantage to the employees and hence possibility of retention is more in comparison to the employee with variable pay.

We may say with Variable pay system we can attract the talent with ease whereas with Incentive plans the retention can be easy, of course, if the reason of resignation is CTC only.

Variable Pay Management: For the organization not having variable pay system for the employees, it becomes very difficult to manage the same as for every such employee the organization needs to develop a separate system not only to evaluate the performance but also to convince the employee about the same. With the incentive scheme organization normally does not face such hurdles.

One can say that author is pro ‘Incentive scheme’ and does not encourage the variable pay system, no it’s not true, the organization well equipped with KRAs and KPIs in respect to each profile and also have their measurement mechanism/ software in place to find the variable system more flexible as it gives the flexibility in hiring the talent with different variable pay even for the same kind of profiles.

Another way of motivation is ‘Hybrid model’ where incentive scheme can be used for front line profiles (sales, marketing, service, etc.) and variable pay system for the back end profile (finance, HR, quality etc.). The author recommends Hybrid model as he has worked as HRBP –Sales with the organization having both the system in parallel and is well aware of the pros and cons of both the systems. In the next article the author will share the various ‘gates’ needed to protect the interest of the organization while designing incentive schemes.


Author- Devasheesh Kumar is General Manager-Human Resources at C&S Electric India Ltd.

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