Dear Workforce How Do We Change to Variable Pay for Salespeople

By Staff Report

Nov. 18, 2005

Dear Paying:

This is a common situation that requires you to examine two important issues. Do you:

  • Want to increase the variability of employee pay based on individual performance?
  • Deliver variable pay more than once a year (e.g., monthly or quarterly)?

Typical pay-raise systems use objective and subjective performance metrics to determine relative pay increases. A top performer may get a 4 percent to 5 percent raise, an average performer a 2 percent increase, while someone failing to meet expectations would get nothing. If this is how your pay raises are determined, then what you have is an annual variable-pay system in place, albeit one that provides only for pay increases based on performance.

Pay-for-performance systems, on the other hand, usually have two components: base salary and incentive, or variable, compensation. The variable-compensation portion is generally determined by objective and subjective measures of each employee’s performance relative to a pre-established set of goals. The incentive portion often includes a large cash component. Instead of 2 percent to 4 percent of annual pay, it could be as high as 30 percent to 40 percent of total cash compensation.

Companies typically use their annual pay-increase budget to fund the creation of a pay-for-performance system. This is done by holding annual salaries at their current levels and annually increasing the pay-for-performance budget with the funds normally reserved for annual pay increases. In the first year, the pay-for-performance (variable pay) budget may be only 3 percent, and then grow to 6 percent the next year and so on.

The specific formula you propose to management would be calculated by first determining the desired pay mix of base salary and incentive compensation. For example:

80 percent
Base Salary
20 percent
Incentive Compensation
100 percent
Total Cash

Next, you would determine the number of years it takes to fund the variable incentives using your current annual pay budget.

You would then have the beginning of a variable-pay system. Don’t forget to re-evaluate the appropriateness of the current metrics used to evaluate employee performance. Once you increase the amount of pay associated with performance metrics, be certain that these metrics are driving the right behaviors throughout your organization.

SOURCE: Andrew D. de Lannoy, principal, sales force effectiveness and rewards,Mellon’s Human Resources & Investor Solutions, New York City, December 23, 2004.

LEARN MORE:Can Pay for Performance Really Work?

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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