Monday, 13 January 2014

Underpinning variable pay practices

Findings of the very large number of studies and investigations carried out over the years and across the globe on the effectiveness of variable pay, determined and granted on the basis of individual performance, have revealed that in many circumstances this approach has produced very good results, whether in many other cases just failure and fiasco. This can only lead to the conclusion that the successful implementation of a variable reward programme depends on the circumstances; by extension the effectiveness of variable pay practices can be essentially deemed as contextually-based.

The fact that the introduction of a variable pay scheme ends in failure does not necessarily entail that the organization is not compatible with the introduction of such type of programme. The reason why the initiation of a variable pay plan proves a failure might in fact be due to the launch of the wrong programme or to the introduction of the right programme at the wrong moment. The contextual or situational aspect is therefore unquestionably of paramount importance.


The design and development of a variable pay scheme are usually fairly demanding, it is therefore unlikely that, after the efforts and resources deployed to design, develop and introduce a new scheme later resulted in a failure, an organization and its management would be willing to make another attempt, unless a considerable length of time has passed. When introducing or amending such programmes hence employers and reward professionals have to carefully consider all of the possible backlashes and potential causes for failure at the outset. It has to be definitely considered preferable postponing or even withdrawing the introduction of the scheme rather than introducing the wrong programme or the right plan at the wrong moment.

Albeit the miraculous recipe for a universal variable pay scheme does not exist, there are a few tenets and aspects which, if respectively duly considered and managed by the architects of the scheme, can enable these to design the most appropriate programme effectively fitting the organizational circumstances. If the worst comes to the worst, duly considering these elements at the outset will enable employers to avert disaster and cushion the eventual blow. Indeed, the successful or otherwise introduction of the scheme is essentially based on the accurate and thorough knowledge of the organization and of its people and on the investigation of all of the aspects which may have an impact on the employees concerned, both individually and as part of a group.

The first aspect which clearly needs to be taken into consideration is hence represented by the contextual factor. Reward practices, regardless of employers’ awareness, talk. The behaviour and actions which the employer wants to recognize by means of variable pay has to be reflected into the organizational culture, or rather, be reflective of organizational culture, and must be in line with the current business circumstances, financial conditions included. Consistency, as usual, is crucially important; introducing, for instance, schemes rewarding individual performance whereas the organizational culture is aiming to foster teamwork or introducing a new scheme when the business is experiencing financial difficulties, which may put the concern in the position not to pay the promised cash additions, can just represent a couple of glaring examples of this type of scheme misuse.

Employers and business executives tend sometimes to underestimate the effects produced by the introduction of new policies which later reveal to be inconsistent and inappropriate, not to mention ludicrous. Indeed, being different the one from the other, individuals may react to the introduction of a new scheme in many disparate but negative ways do not necessarily openly manifesting their disappointment and discontent. This, however, does not really mean that individuals do not perceive inconsistency and the eventual lack of integrity and that this does not affect their sense of belonging, motivation and ultimately performance. Additionally, all too often it is the occurrence of events like these which accounts for organizational climate being perceived by individuals differently from the organizational culture that the business management is striving to foster within the business.

Whether within a firm should actually coexist differences from the contextual point of view, employers could appropriately decide to implement different schemes according to the different organizational areas or business units peculiarities. These contextual differences may also be reflected in the existence, within the same company, of different cultures. Under these circumstances, in order to ensure the scheme consistency and favour its employee acceptance, the introduction of different schemes could even be preferable to the introduction of a unique common programme which might work well in some cases and drastically fail in others. This objective, according to the circumstances and to the type of scheme, could also be attained by maintaining the same scheme framework but changing in some way the mechanic by means of which it is operated in practice.

Context and situations are however very likely to change over the time, the contextual factor has therefore to be considered as a fairly dynamic aspect influencing variable reward schemes. It can consequently be concluded that variable pay programmes need to be flexible and adjustable in order to be amended according to the possibly changing circumstances. This feature leads to consider schemes’ maintenance as an additional key aspect to be carefully weighed up by reward managers and professionals. What works well and proves to be appropriate at the moment in time may reveal to be outdated, inappropriate and not working by any means in the near future.

In the light of the changeability feature of the contextual factor, and practically as a natural consequence of taking account of this aspect, variable pay plans need to be tailor-made. Reward managers should therefore act as bespoke tailors capable to design variable reward plans meeting individual and organizational needs under the current circumstances, but being at the same time constantly ready to re-design and implement the required alterations as soon as these might be required.

The effectual introduction of variable reward plans is very much depending on their credibility and trustworthiness. Albeit, as we will see later, execution typically represents a key success factor when introducing and altering management and HR practices, it is worth stressing the importance assumed, especially in this case, by the design and development phases.
In order to a variable pay programme be genuinely trusted by individuals, it is important, first of all, that each award granted by the employer is proportionate to the actions and outcome produced by the individual concerned (Reilly, 2003). A small premium for an outstanding feat or achievement will be negatively perceived by an individual as well as the award of a large amount of money for the attainment of a relatively modest, albeit appreciable and appreciated, result would be. The respect of this tenet is also important in order to establish a clear scale of values and the worthiness of variable rewards. Individuals need to be aware from the outset that their actions, activities and consequent appreciable output are rewarded with a premium whose worth is proportionate to the objective value of their attainment.

As suggested by Reilly (2003), it is also absolutely important for employers to establish a clear line of sight between the outstanding achievement, behaviour or performance and reward. Is has not to be neglected that the moment a variable reward plan is introduced, this has to clearly communicate in practice the scope for its introduction. Establishing and maintaining a clear cause-effect relationship between achievements and pay additions represents therefore the best way employers can factually communicate and show individuals that the scheme is fulfilling the promise.

Inasmuch as reward systems need to be fair, equitable, unbiased and sustainable, a fortiori these tenets need to be at the basis of variable reward practices. Only and only if employees perceive and feel the scheme as fair and equitable will these trust it and contribute to its successful implementation enabling, in turn, employers to attain their intended objectives.

Transparency, clarity and simplicity definitely represent additional, pivotal features of a variable reward scheme. In order to trust and appreciate the scheme individuals clearly need to understand it and its mechanic. Communication and employee involvement, as usual in such circumstances, is crucially important and can really make the difference.

Notwithstanding, the careful design and development of bespoke variable reward schemes can head employers nowhere without appropriate and consistent execution. Fairness, proportionality and timeliness can be impressively put on paper but whether these underlying principles are not properly implemented in practice, the introduction of the scheme can just be destined to end in an inevitable and predictable failure.
Companies’ managers need to be involved in the process and have the genuine feeling and conviction that the introduction of the scheme can actually help them to effectually attain their objectives, as well as those of the organization, by receiving the full support of their direct reports.

Inasmuch as employees will trust and accept a new plan whether they really know it, managers can support and become convinced advocates of the scheme if they are familiar with the mechanic of the scheme and of the way it has to be managed and operated. Provide to all of the business managers training in the way the scheme has to be managed will certainly avert many issues to raise soon after the scheme introduction and throughout its execution.
Taking into account all of these elements can definitely help reward managers and professionals to design and develop sound variable reward plans, safe in the knowledge that financial reward in general and variable pay in particular can be regarded as a means to an end and not as the only means to the end. The effectiveness of financial reward is essentially based on the bundle approach, that is, on the synergetic use of different, simultaneous actions on which is in essence based the total reward approach. In any case, employers and managers should also act on Herzberg (1987) suggestion: "if you want people motivated to do a good job, give them a good job to do."

Longo, R., (2014), Underpinning variable pay practices, Milan: HR Professionals [online].

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