Definitions of variable pay
• The Workplace Employee Relations Survey
(Kersley et al, 2006) defines variable pay as
having three main forms – performancerelated, 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
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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 rewards
Profit-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 profitrelated 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)