How to Design Variable Pay Plans to Incentivize and Engage Your Team
I have to be honest, the past couple of weeks of my life can easily be characterized as blissful, upbeat, and downright thrilling! One might think the levity in my step is due to summer’s dynamic and awe-inspiring energy or the fact that my family vacation is right around the corner. While the aforementioned are also true, I must admit it has everything to do with the fact that the Cleveland Cavaliers won the NBA World Championship and simultaneously made history!
Like all Akron, Ohio natives, around 11:45pm on Sunday, June 19th, I was overjoyed, filled with exuberance, and simply delighted the Cavs brought my hometown a championship.
You're probably thinking by now, "what in the world does this have to do with variable pay?"
Well, while I was basking in those final seconds of Game 7, it struck me that much of what played out over the course of 48 minutes had a lot in common with our consulting engagements for variable pay design.
As a sports fan and passionate Compensation Consultant at Helios HR, I am constantly observing how employee performance impacts overall company and team success.
Over the last couple of months, I have had the pleasure of designing variable pay programs tailored for a wide range of clients including an early childhood education center, a cutting-edge technology company, a law firm, and a professional services consulting firm. Tying each variable pay program back to their individual strategic plan and goals for the business, of course.
While the diversity of these businesses all brought their own unique set of complexities, the essential elements for each variable pay plan were practically identical regardless of industry and strategic plan. So, I thought I'd lay out the top three emerging compensation trends I'm seeing consistently across all industries- even basketball.
3 Trends in Preparing a Game Plan for Variable Pay
All compensation incentive plans usually originate in the mind of a business leader or leadership team as a strategy for motivating employees to drive performance and organizational success.
Once the leadership team identifies the key initiatives that drive the mission and vision, divisional and department heads can develop specific functional goals that directly align to the overall financial and business success.
No matter the leader, the industry, or organization size, each variable pay consulting project always starts with a strategic planning session to focus on the mission and goals. The outcome of this first meeting sets the tone for the rest of the compensation project.
2. Individual Contributions with a Clear Line of Site
Business leaders today all expect and stress the importance of individual accountability. Traditionally, compensation incentive plans were mostly aligned to a financial or company metric. However, over the years there has been a shift towards including a significant individual component to variable pay incentive plans. This is intended to help piece together how their role can make an impact on the business goals and drive individual success.
Leaders now recognize and understand the clear line of site between employee engagement, employee performance and business success.
Goals need to be clearly defined, meaningful, realistic, and effectively communicated to the employee. When tied with a financial opportunity for hitting these goals, employee engagement typically deepens and performance improves. Additionally, when employees believe in the mission of the organization and ability to impact their financial destiny, they feel more motivated by the meaning and purpose of their work.
So what does this have to do with the basketball game?
Individual player performance is what ultimately led the Cavs to the championship. Great coaching and key plays that took place near the end of the game helped the team actually snag the win.
However, prior to those critical moments taking place, the team had to establish each players’ role at the start of the season to ensure the team was successful enough to make it to and through the playoffs.
Defining what each player needed to focus on to make the entire team a success was essential to the team’s success. Once each role was clearly defined, the players were able to practice and execute against their role-specific goals, which ultimately played a part in the team’s broader success.
3. Discretionary Component
If someone were to ask me what my favorite compensation incentive plan or variable pay feature is, I will most likely tell you it is the discretionary feature most leaders want included within their plans.
Being able to adjust the final payout up or down based on the intangibles related to performance allows leadership to send the right message with regards to pay.
Most of the variable pay plans I typically design, measure for actual performance, or the ‘what’, and once the measurement period comes to a conclusion, the option to adjust that award up or down captures ‘how’ the employee performed. This approach ensures there is a balance between the objective and desired behavior.
This variable pay design feature allows leadership to message their overall thoughts on performance to employees to either 1) encourage employees to continue performing and behaving in the manner in which they currently are, or 2) to point out issues and course-correct to ensure performance and leadership expectations are aligned.
When top performers go above and beyond, many times the business benefits from these efforts and leadership seeks to share the success by providing additional compensation or some type of recognition award. Top performing and motivated employees will more than likely go above and beyond knowing their efforts will reap a greater monetary reward; and conversely, employees who didn’t give their full effort will feel it in their pockets when their final payout is less than what is expected.
Either way, having a discretionary component lets employees know they have even greater control over their final award be it good or bad. The choice is theirs to make in terms of overall effort and expected payout.
Upon entering the Finals, each player had the opportunity to play their heart out and do everything they could to bring home the coveted ring and bragging rights to their respective city.
The person who provided the most value and effort towards winning the title is typically the person who receives the Most Valuable Player (MVP) award. Everyone was made aware of the opportunity well before the commencement of the finals, and everyone had the opportunity to win the title pending player performance.
When the final seconds ticked off of the clock, and it was obvious the Cavs would be victorious, the experts had a chance to review who was number one for points, rebounds, assists, steals and blocks, and it was no surprise who reigned as King!
While the whole team had a chance to participate and win this coveted honor, only one person could be recognized…and that was the person who was the top performer!
Leveraging employee performance and growth to impact and strengthen results makes total sense and is often the key to high-growth business success. What often can get overlooked when operating in a fast-paced, growth-oriented business is the foundational elements that make it work. In summary, it is imperative to have:
- an overarching strategic business mission/goal established and communicated
- individual performance and contributions captured, measured and discussed
- and most importantly, that the final award reflects the overall efforts.
As a seasoned compensation consultant, I believe these plan components are essential to the success of any variable pay plan and will result in positive outcomes for both the employee and the business.
Now, let’s go get a slam dunk for the year!