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Shift to Variable Pay Motivates Success
'At-risk' rewards are growing global trend

By Stephen Miller, CEBS  6/24/2014
 

ORLANDO, FLA.—Evolving to a rewards structure that emphasizes performance-based variable pay is a massive cultural change in any organization. But the transition could be vital to keeping an engaged and motivated workforce, said John A. Rubino, president of Rubino Consulting Services.

Rubino was the speaker at a session about the nuts and bolts of “Comprehensive Variable Rewards” at the 2014 Society for Human Resource Management Annual Conference & Exposition.  Lump-sum variable pay rewards are a growing global trend.

“If you’re not doing it now, you need to be ready” for the changeover, Rubino advised. “The days of retiring on the job and just showing up are over. Everyone must produce value” for organizations to remain competitive.

Begin with Performance Management

Rubino is a firm believer that if an organization adopts variable pay, “every single employee should be in the variable plan.” This first requires a fully functioning, rational performance management system that establishes objectives for everyone within the organization, “from the delivery person to the CEO.”

If there aren’t performance measures—qualitative and quantitative, as appropriate—for every job, “ask yourself why that job exists,” Rubino said. “Every job has an acceptable level of performance, and a performance level over and above the average” that is measurable, or should be.

Performance criteria must be discernible, valid and understandable. Focus on three or four true milestone objectives, but don’t overwhelm employees. Instead, “maintain a clear line of sight between job performance and rewards,” with regular formal and informal performance feedback, Rubino recommended.

Variable reward opportunities must be perceived as substantial enough to motivate performance, with a marked distinction between those who go “above and beyond” and those who do not.

“A $5,000 award for an executive making $2.5 million won’t mean much, but $5,000 for a worker earning $25,000 is a meaningful payout.”

Rethink Base Pay

Shifting to variable pay means base salary will shrink as a percentage of monetary rewards. Start by slowing down the growth in salaries as lump-sum awards are introduced, Rubino said. The difference between the base salary “merit” budget and the market adjustment factor can be used to partially fund the variable reward program.

“In truth, base pay increases have been a poor motivator,” because merit base pay increases are largely a myth, Rubino said. “You can’t motivate top performers with a 2.5 percent salary increase,” he noted.

“Remove performance entirely from base pay; make market adjustments only,” Rubino advised. Place all performance rewards (company and individual) in the variable plan. With variable compensation paid through lump sums only when performance warrants, pay is “at risk.” Employees are quick to realize when “base pay is based on the market, lump sums are based on me.”

Manager Buy-In

“Middle managers will make or break the total rewards program," Rubino warned, so involve them when designing variable pay “and, especially, in performance criteria identification.” It's essential to “build trust and get buy-in from managers and employees through effective training and communication.”

If designed and administered properly, payouts to employees will yield “slices from an expanding financial pie,” Rubino affirmed.

“Employees now understand their place in the organization, the roles they play, and exactly what they need to do to add value to the company and to make more money. Most importantly, the best and brightest are engaged.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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