Variable pay is employee compensation that changes. It is often used to recognize and reward employee contribution toward company productivity, profitability, teamwork, safety, quality, or some other metric deemed important by senior leaders. This performance-based payment is common in the sales field where pay is limited only by the salesperson's ability to close deals.
The employee who is awarded variable compensation has gone above and beyond their job description to contribute to the organization's success. Variable pay is awarded in a variety of formats—including profit sharing, bonuses, holiday bonus, deferred compensation, cash, and goods and services such as a company-paid trip or a Thanksgiving turkey.
Why Employers Must Offer Variable Pay and Benefits
Variable pay is an expected employee benefit to excite and retain employees. They want the opportunity to earn variable compensation to bolster their base salary. And, today's employees are also looking for more than just a base salary and benefits package when they decide to come on board and work for an employer.
It is no longer enough for a company—even a global company—to offer the same generic benefits to every person they hire. Employees now expect comprehensive benefits packages that are tailored to their own personal circumstances—not just to broadly defined demographic needs.
Personalizing benefits packages starts with employers truly understanding what their employees most want because benefits are only as valuable as each employee views them. The greater the flexibility and variety of the benefits program, the more likely your employees are to feel appreciated. For instance, a young employee with no children might see no value in a life insurance benefit but would appreciate an extra day or two in paid time off.
Employer Costs in Pay and Variable Pay
According to the Bureau of Labor Statistics, supplemental pay benefit costs for private-sector employees in March 2019 averaged $1.10 per hour worked or 3.2% of total compensation. Supplemental pay includes employer costs for employee overtime and premium pay, shift differentials, and nonproduction bonuses.
Nonproduction bonuses are given at the discretion of the employer and are not tied to a production formula. Common nonproduction bonuses include end-of-year and holiday bonuses, referral bonuses, and cash profit sharing.
A Critical Step Is Explaining Employee Variable Benefits
Employers must present employees with both the intrinsic and extrinsic value of the benefits they offer in an easy-to-read and understandable format. Conveying benefits packages in layman’s terms is not an easy task. Efficiently relaying this information is a time-consuming—but critical—task.
From health insurance to retirement plans to variable compensation, one company may offer many types of benefits for employees. Some of these benefits can confuse employees. For example, employees might not know how much to contribute to a 401(k) or if their health insurance premium deductible is reasonable.
Make sure your system gives employees access to a resource to ask questions in real-time about which plan makes the most sense for them or their families.
Offer Benefits Consistently
Employers need to be very clear about how an employee can earn variable compensation, how much they are paying, and who is eligible to receive it. If the employer communicates particular goals, levels of productivity required, or quality standards to achieve, it is critical that every employee who achieves the goal receives the reward.
In the same vein, it makes sense for employers to openly share information about the cost of benefits. The typical employee has no idea by what percentage his compensation increases because of the value of his benefits.
If an employer is clear about how much the company is investing to make its employees happier and healthier, those employees will have more appreciation for the benefits offered.
Ask Questions, Make Changes
One of the most difficult challenges for HR departments—especially as they start to add new benefits—is having an open line of communication with employees. Explaining benefits well is only half the battle.
Companies should also consistently survey their employees (quarterly is recommended) to understand their benefits satisfaction. If a company realizes that a particular benefit isn’t working or isn’t valuable to employees, they should announce the benefits changes they will make to address the dissatisfaction. Employees will see that the company cares about their feedback.
Great Benefits Help Employment Brand
It is impossible to develop one single benefits solution that will take care of every employee, especially if you consider the diversity of locations, family, health, financial, and travel needs. Employees do, however, need to understand the value of the personalized benefit program that you offer to them to value you as an employer.
A modern, cutting-edge rewards experience can help position your employer’s brand as an industry leader.