Henk Verhoek: How to use variable pay to improve organisational performance

I engage in regular discussions to introduce pay for performance for all employees in our organisation. Responses are pretty mixed and range from “What KPIs do we use?” and “It is possible to create a line of sight for everyone?” to “Bonuses for all? We don’t want to give money away, do we?”

Lego bar chart

In recent years I have seen an increase in appetite to at least consider the introduction of variable pay programmes. Business results are under pressure and the retention of the workforce is seen a very interesting challenge with just inflation rate as a tool to increase the base salary element. Variable pay is, in my view, an excellent alternative to consider.

In my years in reward, I can honestly say that I never introduced incentive plans that costed the company money. All incentive plan introductions have taken place on a self-financing basis and have improved the organisation’s performance. So how do you do it?

Align the programme to strategy

Successful variable pay programmes must be aligned with the overall total reward strategy, human resource strategy and the business strategy. Used in the correct way, variable pay will drive performance of your business in the desired direction.

Choose the right form of variable pay for your business

Whether results-based or performance-based, short- or long-term, paid in cash or in shares, an effective variable pay programme is different for every company and type of business. The right variable pay programme should contribute to the overall organisations’ success and should be a good fit to your organisational context.

Measure performance

To measure progress, provide visibility and set direction of the variable pay programme, some sort of performance management system should be implemented. You need to introduce the right measures that make sense from a business perspective and employees, who are part of the programme, should understand what they mean and how to achieve them. Performance management is a continuous process, measuring and making sure the goals set for the individuals and teams contribute to the overall business direction. The aim is to continuously improve the performance of the individuals, teams and your organisation.

Get implementation right

Essential to the variable pay programme’s success, after organisational approval is given, is its introduction. Everyone who is part of the programme should have understanding and visibility of what they are being measured on and how they can achieve their individual and team goals. A successful variable pay programme should not reveal any surprises to the organisation and the individual participant when pay out time comes.

Evaluate the programme

After implementation and having a variable pay program operational, you should evaluate the effectiveness of the programme. Make sure your variable pay programmes have line of sight for the participants, are competitive in the labour market in which your business operates and are aligned with the business strategy.

Variable pay is an excellent method to link pay to performance, it helps your organisation to focus on those issues that drives the organisational performance in the right way and increases the overall satisfaction of total reward packages. I love variable pay!

This article is written by Henk Verhoek, head of international reward at British Sugar.

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