In the modern age of 21st century, an employer is required to adapt themselves to workplace changes and trends if they hope to remain competitive in today’s market. To minimise today’s heightened risk, businesses must reduce their investment into fixed costs and maximise the use of variable costs, and considering that employee compensation is usually a company’s single biggest expense, a company should strive to optimise the balance between fixed and variable pay.
Two leading economic ideologues in the discussion of worker compensation are the concepts of ‘variable pay’ or ‘pay-at-risk’, and ‘objectives-based-incentive-pay’ or simply ‘objective based risk’.
‘Pay at Risk’
Defined as “a payment system under which money rewards vary with measured changes in performance according to predetermined rules,” variable pay makes the basic assumption that the primary motivation of an employee is money and are willing to put forth more effort for more money. The first reason for embracing variable pay is purely economic: you pay less if your employee performs less, which should make it a no-brainer for most businesses. Furthermore, if you face hard times due to your market situation, such as the oil sector right now, fixed rate wages cannot be changed, and leads to the necessity of sacking many employees. However, a variable pay scheme means that the hard times can come, but the need for redundancies and firing off staff may be buffered by the reduction of fixed costs.
‘Objective based risk’
Taking a different approach to employee compensation, objective based risk is simply a check-list of ‘objectives’ that the employee must successfully achieve. Usually assessed on a monthly or quarterly basis, each employee’s monetary compensation is dependent entirely on how well they have met their performance oriented tasks. If they meet the objective expectations laid out by the employer, they will receive compensation. However, if they fail to meet these expectations, their compensation is reduced and a stern word is had with the manager on why exactly they failed to deliver. Such approaches reward employees that can demonstrable a quantifiable impact on the enterprise, and dissuade those that perform poorly or simply ‘clock in – clock out’ each day.
Weighing in: Which is Better?
Depending on which scheme you choose to follow, employers can reap the benefits of more efficient and higher performing employees, if you can successfully implement it, that is. At the end of the day, while the theory may sound great on paper, the installation and maintenance of such practices may take up more resources than you save in reality. And in reality? The majority of incentive compensation schemes fail, as do the majority of variable pay plans. At times, an employee may be faced with the realisation that they have no influence on the bottom line or clients and feel disempowered by compensation schemes that are out of their control. Proceed cautiously, as establishing new pay structures is a whole new endeavour in itself.
By: Alexander Droujinine