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Performance And Variable Pay

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Variable pay should depend on current performance, rather than as an indicator of future competence.

Should employers take any cognisance of talent potential as well as performance when structuring variable pay schemes?

Let’s first answer the question, “What is variable pay?” The concept of variable pay stems from a ‘pay-for-performance’ philosophy. Thus, variable pay is linked to performance – it is ‘variable’ because ‘performance’ is variable.

What is the talent grid trying to achieve?

1. On the vertical axis, it identifies the future potential of talent.

2. On the horizontal axis, it identifies the current performance of talent.

So, given that variable pay is awarded for performance, is it only the horizontal axis (current performance) that applies to variable pay schemes? If the vertical axis was brought into the equation and impacted upon variable pay, it would be a bit like

an insurance company paying out a claim when the claim event has not yet occurred!

Paying variable pay for performance

A ‘pay-for-performance’ philosophy appears to be sound practice, but at what level of performance should variable pay kick in? This is ultimately determined by the employer’s performance culture.

In a high-performance organisation, variable pay would only be paid further along the performance curve compared to other organisations.

A practice to guard against is awarding variable pay for performance that does not at least “meet requirements”. The reasons for this include:

• From a behavioural point of view, this can only serve to upset the high-performers. Why should they work hard to achieve great results when those who under-achieve are also rewarded? This can easily lead to a “passenger” culture creeping into the organisation, where all performance gravitates towards mediocrity

• From a legal perspective, an employer could find itself in the labour court if it has dismissed an employee for under-performance, and the employee argues that they received a performance incentive, tacitly implying that they have performed.

So, if an organisation avoids this trap and only awards variable pay for performance that at least meets requirements, what’s wrong with that?

The answer is simple – the more towards the left of the performance curve that variable pay is awarded, the less is left over to award at the right hand side. The latter represents those who have performed particularly well, compared to the former who have merely met requirements. Isn’t that the role of guaranteed pay – the quid pro quo for performing a specified job?

There is no right or wrong answer, or a one-size fits-all solution. There is only what is appropriate for a particular organisation.

Consider the range of what may be appropriate as follows:

  1. Typical of a very high-performance culture the pot is reserved for those who performed exceedingly well:

1

  1. Typical of a lesser high-performance culture:

 

2

 

C.       The “middle-of-the-road”:

3

Table

In summary:

• Variable pay can only be linked to current actual performance, not the promise of future/potential performance.

• Choose the performance level at which variable pay is awarded in line with the organisation’s performance culture. ❐

Author: Craig France CA(SA), Executive Consultant and Chris Blair (B.Sc. Eng. (Chem)), CEO at 21st Century Pay Solutions Group (Pty) Ltd).