Definitions of variable pay

• The Workplace Employee Relations Survey (Kersley et al, 2006) defines variable pay as having three main forms – performance-related, profit-related and employee share schemes.

• The CIPD (2006) defines it as ‘the practice of paying an amount of pay in addition to or instead of base pay as part of an employee’s total remuneration which varies according to criteria’.

Forms of variable pay

• Incentive pay• Bonus• Commission• Payment by results (PBR)• Merit pay• Individual contingent pay• Performance-related pay• Pay for contribution

The dimensions of variable pay• What is being measured? Inputs or

outputs?• What period of performance does the

payment reward? Short-term or long-term?

• Does the payment reward an individual’s performance, or does it relate to team or organisational success?

• Is measurement based on a single or on multiple factors?

• What form does the reward take? Cash, shares, or non-financial reward?

Major categories of variable pay

• Individual results-based schemes (eg piecework, sales commission)

• Team-based rewards

• Collective short-term incentives (eg gain-sharing, profit-sharing)

• Collective long-term incentives (eg employee share schemes)

Types of variable pay

Work-measured schemes• These are the most common form of

results-based incentive in production industries.

• In work-measured schemes the job or its component parts is timed and a standard time set for completion of the task.

• The incentive is related to the worker exceeding this standard time target for the task.

The British standard scale of rating

Team-based rewards

‘Team rewards consist of payments or non-financial rewards provided to members of a formally established team. They are linked to the performance of the team as a whole, and are awarded in addition to the individual pay received by each member of the team.’

Armstrong (2000)

Types of teamworking

• Process teams

• Parallel teams

• Project or time-based teams

Collective short-term rewardsProfit-sharing• Two main types of scheme: cash

schemes and stock option schemes. • WERS 2004 found that 30% of

workplaces had some employees in receipt of profit-related payments or bonuses.

Gain-sharing• A scheme whereby the organisation

seeks to share the financial benefits of any improvements in productivity or performance with the workforce.

Collective long-term rewards• Collective long-term rewards are those

that reward organisational performance, but where the receipt of the reward takes longer than 12 months (Shields, 2007).

• The main form is the employee share ownership scheme, where workers own shares in their employing organisations.

• Either employees are given shares or they have the option to purchase them.

UK share ownership schemes

• Share Incentive Plans (SIPs)

• Savings-related schemes

• Enterprise Management Incentives (EMIs)

• Company share option plans (CSOPs)