Variable pay is the compensation given to an employee based on their performance in addition to their salary. Variable pay for employees is paid in different ways and there are different methods of calculating it. Variable pay varies from one organization to another.
Variable pay can be seen as the bonus or incentive or commission that is given to the employees to recognize their performance. Variable pay is usually given if the employees meet and exceed their expected targets for a given period of time.
Variable pay is usually linked with employee performance as well as the firm’s performance. Variable pay differentiates the top performer from the average ones. Top performers would get the highest pay whereas the poor performers would end up getting only the salary.
Variable pay is also known as performance linked pay wherein the pay varies with the performance. The better the performance would be the pay.
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What excites an employee to join an organization?
Salary is the basic component of any organization but the variable is what excites the employees. Organizations that offer good incentives and variable pay options have higher chances of retaining employees.
Employees would be excited to join an organization that has a good variable pay structure as they are rewarded on the basis of their performance and every person would like to be rewarded on their performance. Variable pay is the best way to recruit top-performing employees.
Variable pay is proven to reduce attrition in firms. The attrition rate is the number of employees leaving an organization to the total number of employees working in the organization.
There are many instances where the employees have waited for their variable pay before leaving the organization or changed their minds because of variable pay. It can be said that variable pay would reduce the attrition rate in many organizations.
But it is very much important for firms to design attractive variable pay options so that they can reduce attrition rates and retain the best talent in the industry.
Employee satisfaction variables:
There are six main variables (Monica Izverciana Sabina Potraa & Larisa Ivascua, 2016) that influence the job satisfaction of an employee in an organization. They are:
- Disturbing factors such as overburdened by work, stress on the job, frustration due to the work and work environment, conflict due to various reasons, routine work resulting in fatigue and boredom, and interest mismatch.
- Motivational factors such as reputation in the organization, promotion opportunities, material reward, non-material reward, attractive domain, and personal development.
- Social interaction includes communication, collaboration, teamwork, knowledge sharing, peer relationship, and listening to one another.
- Employee characteristics such as personal traits, feelings, needs, skills, experience, and education.
- Organizational environmental characteristics such as department management, work conditions, resources, authority, organizational culture, and the other following procedures.
- The organizational perception includes competition, community orientation, job security, bureaucracy, employee orientation, and innovation driven.
Need for Variable pay:
The need for variable pay is being discussed very seriously by researchers as it is having a profounding impact on the performance of the employees. Top-performing employees would like to be rewarded without which they would compare themselves with low or average performers and would not be willing to perform at their full potential.
Variable pay would act as a motivation factor for the employees to perform at their full potential. Variable pay is an extrinsic motivation that is given to employees from outside. Intrinsic motivation is when the employee is interested in doing the work by themselves out of their interest.
Intrinsic motivation combined with extrinsic motivation can improve the performance of employees to a great extent.
Motivation can be through various ways but extrinsic motivation in the form of variable pay is the best kind of motivation one can get. Employees work for money and nothing can give them more motivation than variable pay and recognition at the workplace.
Promotions without pay would be a demotivating factor for the employees. So the higher the variable pay, the higher the employees would work to achieve their variable pay. Variable pay has proved to increase the performance of the employees in an organization.
Variable pay on a monthly or quarterly basis acts as a strong motivation when compared to variable pay on an annual basis.
Best ways to get employees excited about work:
The best way to get employees excited about work is to offer them the motivation to work. The motivation to work can come from any of the factors mentioned above broadly divided into intrinsic motivation and extrinsic motivation.
Intrinsic motivation comes from within the employees and it cannot be given externally, whereas extrinsic motivation comes from outside. The most common forms of extrinsic motivation are variable pay such as incentives, bonuses, awards, recognitions, etc.
Feedback is intrinsic motivation as it encourages the employee to work from the inside. Variable pay is found to be the best way the employees to get excited about work.
Variable pay should be designed in such a way that the employees feel that they have a chance of achieving it. If the variable pay is designed in such a way that it is far from the reach of most of the employees, then employees would feel demotivated to work.
Therefore it is of utmost importance to design the variable pay in such a way that it benefits the larger population in any organization. Variable pay is also important for employers to prevent employees from leaving the organization.
Variable pay can be in the form of vested shares known as ESOPs, profit sharing, cash, gold, etc. Variable pay can be in the form of layers or tiered commission structure which would motivate the employees to achieve one by one steps.
Variable pay for employees is most commonly seen and found in target based jobs such as sales jobs where one has to achieve a certain sales number to qualify for variable pay.
- Job Satisfaction Variables: A Grounded Theory Approach. Monica Izverciana Sabina Potraa & Larisa Ivascua , 2016.