Question

As a number of variable pay systems (e.g., pay-for-performance or pay-for-knowledge). You have been asked by the CEO of a large Edmonton-based engineering company to explore the use of variable pay for its professional employees (i.e., engineers, technologists, accountants, field managers, project managers). The company has about 3000 employees, mostly in the professional category. The organization already has a reputation for competitive pay practices, but it would like to ensure that it remains an "employer of choice" for its long term employees, as well as for its new hires.

Variable pay has many proponents who promote the connection between good performance and higher compensation. Yet, variable pay also has many detractors, who suggest the disadvantages of this form of compensation can outweigh any benefits, and should therefore be avoided. What do you think?: -

Should this engineering company introduce variable pay, or not?

If you recommend the use of variable pay, which form(s) of variable pay would you choose and why? Should it apply just to engineers or to everyone in the company?

If you recommend against the use of variable pay, what would you suggest the organization do instead to enhance its compensation practices? Or do you feel this is even necessary if the company already has a reputation for offering competitive pay?

Answer 1

Variable pay or pay-for-performance is a compensation program in which a portion of a person's pay is considered "at risk." Variable pay can be tied to the performance of the company, the results of a business unit, an individual's accomplishments, or any combination of these. It can take many forms, including bonus programs, stock options, and one-time awards for significant accomplishments. Some companies choose to pay their employees less than competitors but attempt to motivate and reward employees using a variable pay program instead. Good incentive pay packages provide an optimal challenge, one that stretches employees but remains in reach. If too much is required to reach the goal, the program will be ignored

In my opinion, the organization should go for the variable ay as it has the following advantages:-

Among the biggest advantages of variable pay for employees is that it increases the employees earning potential, and provides a more equitable reward based on efforts.

Variable pay boosts profitability and competitiveness by making employees stakeholders in organizational performance. Employees in the front line of company activities remain best suited to solve problems creatively, generate new workable ideas, streamline processes, and improve products and/or services to satisfy customers better, all which directly translate to better organizational performance.

Variable pay plans motivate employees to perform to their potential, for the higher and better their performance, the higher their rewards. It helps in establishing a competitive performance-oriented work culture and an environment of continuous learning, improvement, and innovation where employees take responsibility for the outcome of their work.

Variable pay also makes it easy to identify the extent of commitment displayed by workers.

Variable pay makes possible pay for performance and thereby supports the shift towards a flat organization with flexible job descriptions and flexible work arrangements. Linking rewards with performance and results help forge a better employer-employee contract in a scenario where the employee either performs a wide range of activities or opts for the level of effort or time invested in the job

I think I would go for the profit sharing mode of the variable pay.

Profit sharing refers to the strategy of creating a pool of monies to be disbursed to employees by taking a stated percentage of a company's profits. The amount given to an employee is usually equal to a percentage of the employee's salary and is disbursed after a business closes its books for the year. The benefits can be provided either in actual cash or via contributions to employee's 401(k) plans. A benefit for a company offering this type of reward is that it can keep fixed costs low.

The idea behind profit sharing is to reward employees for their contributions to a company achieved profit goal. It encourages employees to stay put because it is usually structured to reward employees who stay with the company; most profit sharing programs require an employee to be vested in the program over a number of years before receiving any money.

In my opinion, all those employees who are critical to the success of the organization must be covered under this plan as this will ensure the accomplishment of the organizational goals.