What is Variable Pay?
Variable pay, another name for commission, is a method for compensating employees based on working additional hours or meeting specific objectives.
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Understanding Variable Pay
Also known as incentive pay or commission, variable pay is a method for paying employees beyond their regular salaried hours. It can come in many forms, such as 10% of a sale made or a set bonus dollar amount. It can supplement an employee’s salary or be a portion of their total pay. Most businesses offer variable pay as compensation on top of an employee’s base pay, incentivizing hard work for more payout. Variable pay is standard in sales, real estate, finance, and hospitality industries.
Variable pay is an additional form of compensation beyond base salary, often tied to performance metrics, commonly found in real estate and sales industries.
Benefits of Variable Pay
A variable payment structure allows for some flexibility in compensation. For employers, offering this benefit can be a great way to reduce hiring costs, as starting salaries can be lower while encouraging excellent performance, paying out only when goals are met or additional hours are worked. This tends to increase motivation and productivity. For employees, especially those motivated by money, variable pay can be a great way to earn far beyond their salary, based purely on their work and achievements. With increased earning potential and additional recognition for hard work, employees often have increased morale and job satisfaction with variable pay methods.
Variable pay benefits include flexibility in compensation, reduced hiring costs, and increased motivation for employee performance.
Challenges and Considerations
Setting practical performance goals in a variable pay system requires a strategic approach. These goals should be high enough to be motivating but not so high that they become demotivating. This balance is crucial to ensure that employees are encouraged to strive for excellence without feeling overwhelmed.
Implementing variable pay systems requires establishing management processes, which can lead to employees prioritizing short-term gains over long-term objectives.
Best Practices for Small Businesses
Small businesses should ensure they have the administrative potential to establish clear and effective policies when considering offering variable pay. Set performance goals that are challenging but realistic to encourage workers to reach them. Additionally, always stay aware of larger company goals to not just collect short-term wins. Maintaining transparent communication with employees about your variable pay system, including how they can maximize their potential earnings through it, will help foster trust, motivation, and loyalty. Finally, balancing variable pay with a competitive base salary or benefits will be the best way to attract highly qualified talent.
To optimize the offering, small businesses should establish clear policies and set realistic performance goals for incentive pay while ensuring alignment with long-term company objectives.
Variable pay is an additional form of compensation beyond base salary that often increases employee motivation and productivity. While it offers flexibility and can reduce hiring costs, businesses must carefully manage the administrative complexities and set realistic performance goals. For small businesses, maintaining transparent communication about the system and balancing it with competitive base salaries or benefits is vital to attracting and retaining top talent.
About the author
Casey Pontrelli
Casey Pontrelli is a multi-talented professional with a background in content creation, branding, and social media marketing. Whether writing for a newspaper, eCommerce website, B2B startup, or a marketing agency, she has taken her strong background in journalism and turned her focus to SEO and content marketing. She’s written about everything from boutiques to cars to small businesses, and enjoys most when she knows her writing has had an impact. When she’s not writing up a storm or creating attention-grabbing social media posts, Casey enjoys hanging out with her partner and three cats, Eddy, Larry, and Marcus, going on long walks in the Green Belt, and, predictably, reading.
