Creating compensation packages for your team members is challenging. There are so many factors to consider that it can be downright frightening, even for experienced managers. Ensuring equal pay for equal work, offering a competitive package at recruitment, planning for regular salary increases—the challenges are almost endless. One of the most frustrating types of compensation to get a handle on is variable compensation, i.e. when total compensation is based on factors connected to job performance.
At BeachHead, we have seen all kinds of variable pay, from bonuses based on content output (lines of code or articles written) to customer feedback measures where managers have tried to tie strategic KPIs to the compensation of their team members. One of the most common types of variable compensation is sales-based. Salespeople are generally compensated with some form of base pay plus commission or a bonus based on how much business they bring to the company. The other most commonly used type of variable compensation is stock options, which are typically given at the executive level but in a start-up environment, may also be offered to early team members.
However, using variable pay raises a number of challenges.
Carrot or Stick?
Most jobs require a multitude of skills and factors—far too many to isolate into some small measurable variables. Variable pay or bonuses can be tied to a number of factors and KPIs but, as most managers know, there are many soft skills that make a great employee including teamwork and helpfulness to other employees. These are difficult things to measure but make an enormous difference to the effectiveness of the team. With a variable pay system tied to a single or even a set of measures, employees tend to focus on those particular metrics while ignoring other things important to the company.
There is also the danger of building expectations that the bonus or variable pay will remain constant or even increase year-on-year. As business circumstances shift, management may decide to change what the variable pay is based on. If employees are not able to meet the new metrics they may not be bonus-eligible, causing gross pay to drop year-over-year. This variation in pay can upset employees and potentially cause valuable team members to leave.
The building of variable pay packages rarely takes into consideration the fact that, while the monetary aspect is obviously important, most employees are motivated to do their jobs well by a sense of pride. They want to become a valuable team member by learning, growing their own skills, and contributing to many different parts of the business. Ensuring that their fixed pay is competitive and meets their needs for the position is usually all that is required. It’s only a small segment of the population that is motivated by a variable pay structure and that structure will drive the appropriate behaviours.
What do we recommend?
While it can be tempting for managers who want to align the financial interests of employees with the business goals of the company to develop variable pay packages for their team, we recommend against doing this in most circumstances. While it may create short term incentives for some employees, the long term effects of building variable pay packages based on short- or medium-term business goals can create issues for managers as well as for team members. The exception we would make is for sales. People in this profession are generally motivated by bringing in money for the company. This is a much easier metric to track and can be aligned much more to the company’s interests. However, building variable compensation packages for sales team members can be complex, and the subject of another article.
If you’re unsure whether a variable compensation plan is right for your company, or if you’ve already built one and need to re-examine it, reach out to BeachHead. We’d be happy to help.
Connect with BeachHead
At BeachHead, we are passionate about helping businesses scale up from a strong Operations foundation. The BeachHead Organization Audit (BOA) helps founders evaluate their business through an objective lens. Our BOA scorecard allows us to evaluate all aspects of a growing business so we can recommend changes based on what the organization wants to accomplish in the next phase of growth.
If you’re ready to take your company to the next level, reach out and let’s start a conversation.
Email: rdrynan@beachheadstrategic.com
Phone: 416.888-4004
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