During uncertain economic times, companies often turn to variable-compensation programs to reward employee performance without increasing fixed costs. In fact, 81 percent of product professionals are incentivized with bonuses, according to Pragmatic Institute’s 14th Annual Product Management and Marketing Survey.
Implementing such programs can reduce risk, allow for scalability and help companies avoid awkward conversations about necessary pay cuts during tougher times. It can also encourage employees to feel more involved and engaged, especially when you incorporate these 13 tips for successfully developing a variable-compensation plan.
1. Start with a target, and then devise a plan to get there. Let’s say you feel a position is worth $100,000. Build your plan backward from that amount. Otherwise, you could exceed your budget or even pay too little. Do the math before sharing the plan and include black/gray/blue sky projections with the expected compensation associated with each.
2. Compensate on what the employee can impact. Some roles might feel their responsibilities are too far removed from affecting profit for a profit-sharing plan, for example. Think about what behaviors you are trying to drive as an employer and what result the employee has influence over—then reward that behavior.
3. Don’t pay out until a chargeback is unlikely. If you incentivize employees based on purchase orders, for example, you may have to take that reward back if the client cancels. Don’t demoralize employees by waiting so long that chargebacks are impossible—but rather, until the chance of a chargeback is remote.
4. Metrics should be easy to measure and reportable. Those measurements also should be in real time and easily accessible for employees. For example, if you were basing compensation on number of leads and quality of leads, your employees should know how you measure those leads and have access to contemporary data.
5. Make the plan easy to understand for both employees and management. If additional compensation is based on a complex algebraic problem, misinterpretations can arise. Effectiveness can also be diluted if it’s unclear what is truly being rewarded. Keep plans simple to explain.
6. Strive for a plan that is easy to calculate and pay (preferably automated). Keep in mind that your administrative expenses can add up if your plan is complex or based on manually input numbers.
7. Don’t create criteria that forces unnatural behaviors. Avoid setting parameters that require behaviors outside the scope of a person’s role or skillset. For example, if your sales team is compensated after payment is received, they might chase collections—and potentially harm client relationships. You should also avoid situations where reinforcing one behavior could be detrimental to another. In some organizations, bonuses are paid based on meeting budgets. But imagine if your company is invited to speak at a major conference, and your marketing department turns it down to achieve its travel budget goal. You’ve established a culture that is so focused on making budget, you’ve missed an opportunity.
8. Apply accelerators when appropriate. If your compensation is based on commission, you may consider tiers. For example, x percent on the first $nn million in sales, and then (with your costs recovered) increased percentages in increments above that point. It can be a good motivator to help a company to reach goals, but the same rule applies as in tip number 2: The accelerator should be something they can directly influence.
9. Consider non-cash incentives where appropriate. Not all employees are motivated by money. Determine whether your employees are driven by improved career paths, work/life balance or some other incentive—and then reward accordingly. If your team hits a launch date, give them a surprise day off. Or offer to bring in training for career growth. Even a title change can commend their efforts in a specific area, without necessarily being tied to payment.
10. Consider whether variable compensation truly makes sense. Some employees might be more risk averse when it comes to variable compensation. Moving lower salary employees to variable compensation can create stress for the employees, and their families, while offering minimal benefit to the company.
11. Compare compensation plans to industry norms whenever possible. Websites like salary.com and glassdoor.com can provide salary comps to help ensure you’re not underpaying or overpaying for a role. Remember, your employees can do the same searches, so it’s important to be in line with industry standards.
12. Scrub your plan for holes. No matter how great your employees are, some might look for the path of least resistance to increase their compensation. For example, if you compensate per order, someone might split one order into several different orders. Think of how the plan might be exploited, or how some might intentionally try to work around it.
13. Scrub your plan for unintended consequences. Avoid a case of “my team did what I asked—darn it.” Not properly thinking through your plan could lead to consequences. If you gave a bigger incentive for selling a particular product, your team might focus their attention there—potentially deterring those customers better suited for another product or causing inventory shortages.
At the end of the day, variable compensation can be a great solution to reward your employees for their contributions, while also lessening the burden of fixed costs during turbulent times—but you better be sure it’s the right approach for your company and that you implement it correctly.