Variable Pay: Do We Have the Basics in Place?

Approximately two-thirds of U.S. companies now use some form of broad-based variable pay. Recent research, however, reveals a troubling discontinuity. On one hand, 75% of the participants in a Hewitt Associates study of variable pay expressed a general feeling that their plans helped improve business operations. On the other hand, half of these same executives say that their plans fell short of achieving objectives. Moreover, many of the companies studied do not have systematic methods in place for reviewing plan effectiveness. The confusion and mixed results stem from several sources, including mixed motives for implementing variable pay and a failure to select a form of variable pay suitable for supporting specific corporate objectives. The trend toward greater use of broad-based variable pay is likely to continue making it critical that compensation professionals learn more about designing, communicating, and evaluating this type of compensation.