Variable Pay and PayForPerformance

1
Variable Pay and Pay-For-Performance

• The Compensation Handbook
• Chs. 16 and 17

2
What is Variable Pay?

• The fixed component of pay (i.e., salary) is
  there for doing the job
• The variable component (bonus, merit, piece
  rate, etc.) is for going beyond the job

3
Types of Variable Pay

• Management discretion
• Individual Merit Pay
• Individual Bonus Pay
• Team Pay
• Pay for achieving goals
• Profit sharing
• Gainsharing

4
Whats the Downside?

• Often based on faulty performance evaluation
  methods
• Mostly not administered so that true differences
  in employees performance are rewarded
• Takes a substantial amount of merit money to
  actually affect future performance

5
Tiered Performance Approach
Organization
Group, Team, Unit
Individual
6
Whats Being Rewarded?
Scenario A
Scenario B
1-2
1-2
Organization
1-2
3-4
Group, Team, Unit
3-4
1-2
Individual
7
Profit Sharing

• Generally, the organization sets aside 15-20 of
  the net annual profits
• Pool is distributed to employees by their
  performance evaluation scores OR just evenly
  among all employees
• Usually happens annually in the first or second
  month following the closing of the books for that
  fiscal year

8
Gain sharing

• Assumes employees goals are aligned with
  organizational goals
• Requires employee involvement in understanding
  the business and the potential areas for
  productivity gains
• Usually employees share 75 of gain and
  employer shares 25 (so that there is money
  there for those months that have no gains)

9
Lets Practice!

• Express Auto, a megadealership representing over
  20 car brands, has just received a very
  discouraging set of survey results. Customer
  satisfaction scores have fallen for the eighth
  straight quarter.
• Your job is
• To examine the role compensation plays in the
  customer service problem assigned to your group
• To recommend improvements to the compensation
  system that would likely improve customer
  satisfaction