After two years of painful payroll reductions, there’s enough light at the end of the recessionary tunnel for some employers to begin considering pay raises.
In many organizations, pay hikes will come in the form of variable compensation plans. Properly implemented, bonuses can boost productivity while controlling your fixed costs.
Experts say two tactics can help HR pros create variable pay plans that strike a balance between risk, reward and fiscal stability.
1. Set a sliding scale
Base variable compensation onrelative to a quantifiable baseline target.
Some examples: 10% waste reduction, 5% revenue growth, 10 or fewer errors per week, 20 or more calls handled per day.
Set a base bonus amount—for example, $1,000 per employee. Then pay out bonuses based on how close employees come to achieving or exceeding the target.
Example: Someone who meets or beats the target goal might get the full $1,000 bonus. An employee who hits 80% of the target might get $500.
Tip: Set a payout floor—for example, no bonus for anyone who achieves less than 50% of the target goal.
Pros and cons: While sliding-scale variable pay is a good employee motivator, it’s difficult to budget the amount you’ll spend.
2. Use discretionary bonuses
Create an organizationwide or departmentwide bonus pool and let managers designate who will receive extra money. Managers can recommend amounts, but shouldn’t have the final say. Establish some basic performance criteria and then have an impartial group of executives make the final decisions.
Pros and cons: Discretionary plans allow managers to award larger bonuses to top performers, but this may fail to fully engage the entire employee population.
Details that matter
Consider shaking up the bonus calendar. For example, switch from annual to quarterly incentives. Shorter bonusing time frames allow for midyear adjustments and provide flexibility to deal with changing business needs.
If revenue or cash flow suddenly stagnates, it’s relatively easy to suspend or reduce bonuses.
Be careful when setting bonus caps. It’s essential to place an overall top limit on bonuses organizationwide. But avoid caps on incentives for employees in revenue-generating positions, such as salespeople. Your variable pay plan should keep them motivated to continue pulling in customers and driving new revenue.
Give yourself some flexibility. Make sure employees understand that you reserve the right to make midcourse incentive-plan corrections to ensure the proper balance of risk and reward.
Keep it legal. Have an attorney review your variable pay plan. Discuss how to communicate it to employees without creating any kind of contract. Except for set commissions (which should be bound by a contract), never promise bonuses in any way.
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