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Variable pay is a payment procedure that varies the amount of an employee’s salary to meet expenses. For example, if you need more money in your paycheck to support yourself and your family this month, but are scheduled for vacation next week, then variable pay lets you work until the end of week one before taking time off at the start of week two.,
Variable pay is a form of compensation where the amount of money an employee receives depends on how well they perform. The “disadvantages of variable pay” are that it can be difficult to determine if employees are performing well enough, and it’s not always possible to predict how much you’ll make in your job.
Variable compensation, such as sales commissions, is a means to reward workers depending on employment characteristics other than hours completed. It may be used to boost an employee’s basic income (e.g., a safety bonus) or to replace it altogether. Variable pay, on the other hand, takes time to set up and should be set up to guarantee you’re motivating the desired behavior.
What is Variable Pay?
Any firm that wishes to appropriately motivate its workers depending on some data point—such as units sold, sales revenues, customer service ratings, number of customers, or any other job-related criteria—can adopt variable compensation.
Variable compensation is computed as a percentage or as a monetary sum. It is based on personal or commercial factors, such as meeting objectives or making money. It is intended to be paid to workers in addition to their regular salary. Variable pay is often incorporated as part of a compensation package.
Hourly workers who are paid depending on the amount of hours they work or employees who are paid by the piece get variable pay strictly speaking. Variable compensation, on the other hand, is more typically used to describe a mix of pay kinds used to incentivise staff to concentrate on critical areas of the company, as seen below.
We spoke with an attorney to learn more about the different sorts of compensation and the dangers that come with them.
Attorney Matthew Eanet of Eanet, PC
There is a great deal of confusion regarding this right now, and it varies by state. In California, for example, a piece rate or commission employee must be paid minimum wage for each hour worked, and the employer cannot average paid “productive” hours with non-paid “nonproductive” time.
California lawmakers passed Labor Code section 226.2 in 2016, requiring that employees be compensated separately for “other nonproductive time,” which is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.” For a corporation that chooses to pay by the piece, there is an additional expense of compliance.
Fit Small Business cannot provide legal advice on how to set up your compensation plan. Please consult with an attorney before finishing your variable pay program.
Variable pay refers to a more complicated payroll mechanism than salary or hourly compensation, such as monthly sales, a percentage of revenue collected, or a set sum per customer.
Many businesses, on the other hand, choose to provide a base pay rate (hourly or salary) so that employees are compensated consistently. The variable pay compensation is then added on top of the basic pay. This may be used as a motivator for workers to perform at their best or as a bonus that enables employees to participate in the company’s success.
Consider adopting all-in-one Software for Payroll like Gusto to handle variable compensation for your performance-based personnel such as project team members and sales staff. Gusto is capable of handling a variety of payment formats, including variable pay. For 30 days, you may try it for free.
Gusto is a great place to visit.
Variable compensation may be depending on a variety of factors, such as the number of units sold, and might take the form of bonuses or Incentives. Here are some examples of circumstances.
Commission-based variable pay
Sam works for a farm equipment firm and earns a commission on top of his weekly wage of $500. Sam’s compensation is on a sliding scale. He may go a week without making any commission sales and just earn a $500 check. He could make an extra $1,500 the following week after selling a large piece of farm equipment. As a result, his remuneration is subject to change. Sam’s variable remuneration is intended to encourage him to sell high-ticket products as well as assist current clients with parts and repair.
As a percentage of sales, variable pay
Julia is a media advertising professional who oversees a number of clients. She earns 5% of all advertising dollars spent by her customers each month in addition to her hourly wage. That implies her income (variable pay compensation) fluctuates depending on the payments made by her clients. Julie’s variable income encourages her to keep her present advertising clients satisfied while also seeking out new ones.
As a bonus, variable pay is available.
On a project, Kiko works as an IT programmer. He is paid $65 per hour as a basic salary. He is also eligible for a bonus depending on factors such as whether his projects are finished on time and what percentage of his code meets the testing standards. His variable pay drives him to fulfill deadlines and offer correct code.
Variable Pay based on Peer Recommendation
Employees may offer feedback and Incentives to coworkers based on their work—from high levels of workplace performance to displaying how they embody the corporate values—using newer software solutions like Motivosity and Bonusly. This form of incentive may increase collaboration by motivating employees to do the right thing on the job in exchange for Incentives or awards from their coworkers.
Who Should Use Variable Pay?
Variable compensation is ideal for any company looking to enhance performance via demonstrable productivity gains. Some instances are as follows:
- Organizations that seek to increase the number of units they sell
- Those in the food service industry who aim to boost sales of certain menu items
- Companies who provide home services and wish to increase their referrals
- Services for businesses looking to expand their customer base
- Companies in the healthcare industry who aim to save expenses
- Those in the marketing industry who seek to boost their earnings
- Companies who desire to reduce the time it takes to get a product to market.
Managing variable pay, on the other hand, often necessitates the use of a business software system to handle the data or criteria that the variable pay is based on. If a computer salesman is paid $10 for selling a computer but only $5 for selling a printer, the company will have to keep track of those dollar increments by salesperson and kind of sale. This may need the implementation of a system to ensure that the variable pay component is accurately handled when payroll is due.
Before implementing a variable pay compensation scheme, consider the following questions:
- Do you have the time to monitor the compensation data for your employees?
- Do you have a POS (Point of Sale) System, System for Customer Relationship Management, or accounting software that can handle sales and revenue data?
- Is your pay structure equitable for all employees?
- Is your payment system compliant with your state’s and industry’s minimum wage requirements?
- Will your Incentives persuade workers to do what you want them to do?
Variable remuneration is common in businesses like real estate brokerages. Real estate software solutions are designed to keep track of commissions. If you’re designing your own variable pay system, make sure you have a system in place to handle the computations and payments for the variable elements of your workers’ compensation, as well as what’s standard in your industry. Here’s one recommendation from a CEO:
Cerius Executives’ CEO, Kristen McAlister
Variable compensation has a role to play in attracting and keeping top people. The problem is to make it compatible with both the employee’s motivation and the company’s objectives. When thinking about it, examine “why” you’re providing it before deciding when, to whom, and for how much.
Variable Pay Costs & Benefits
The sort of variable compensation you pick, as well as the amount or percent you pay, will have an impact on how much it costs you to run a firm. This may be done in a variety of ways. However, you shouldn’t only examine the price; you should also consider the advantages. The variable pay component, for example, pays for itself if offering your service workers an incentive to cross-sell more services increases your total sales.
Here’s how to calculate the cost of variable pay schemes in relation to the benefit:
- If you pay a flat rate for variable pay, you’ll have to predict how much it’ll cost you each month based on sales estimates or other data. If you pay $5 for each water heater sold or $1 for each customer feedback card received, for example, you’ll have to estimate your totals and budget accordingly. This works best if you can make a profit on each item after paying the bonus or incentive, and if you have a software system that keeps track of what each person accomplishes.
- Paying workers as a percentage rather than a monetary amount is a challenging quantity to calculate. Let’s assume you pay your salespeople 3% of all full-priced shoes they sell and 1% on bargain products. If your volume grows by 10%, for example, you’ll want to figure out how much it will cost you ahead of time.
At the department and business levels, percentages may also be determined. Consider what your firm accomplished last year and what your revenue rise would be this year with the Incentives in place to figure out how much it will cost.
- If you want to be more explicit about what you value, you may give your variable pay weights. You might, for example, provide staff with one incentive based on total sales volume, another based on customer retention, and a third based on client feedback. You may then weight each of these elements differently, for example, with 50% of their incentive based on sales and 50% based on a 25% split of customer variables.
- Ad hoc – Rather of creating a procedure based on amounts or percentages, you might make your variable pay process relatively ad hoc, in which you decide what to pay and what criteria to apply. For example, one month you could want to incentivise workers to improve their customer service, while the following month you might want to incentivize them to keep their work cars in good working order. You give them a bonus on the spot if you catch them in the act.
In terms of cost, you might want to plan ahead of time how much you’ll give away, such as $1,000 per month for random Incentives. You’ll know whether it’s worth it if you see how people’s conduct changes as a result of what you’re paying attention to and pay Incentives on that month.
Depending on how sophisticated your variable pay scheme is, what data you require, and what technologies you employ to manage that data, it might be expensive to administer. If you need to utilize a System for Customer Relationship Management to keep track of client data or an Accounting Software to keep track of receipts, for example, you may wish to consider the cost of such systems into your variable compensation program.
Providers of Variable Pay
Unless you’re a master of Excel and have a lot of time on your hands, managing variable compensation without software is almost impossible. As a result, you’ll need to discover business or Software for Payroll, as well as a performance management system, to assist you in calculating the performance data that will be used to determine your variable pay.
You have six options for calculating and managing variable compensation for your employees:
Software for Payroll
Software for Payroll can be used when your variable pay is fairly simple, such as Incentives you give to employees for making a big sale, or bonuses when they complete a project. Software for Payroll costs between $10 and $200 per month (or more) and typically has additional fees per employee.
If you’re looking for all-in-one HR/Software for Payroll that can manage variable pay, consider Gusto. Gusto provides employee onboarding and can also set up employee benefits and perks to your team. Sign up for a 30-day free trial.
Gusto is a great place to visit.
Human Resources Software with a Performance Management Function
If your variable pay is based on performance, such as goal completion or Feedback from your peers, then you may need to use HR software like ADP that has a performance management feature. This allows you to set up the performance aspects of the software in such a way that the data feeds into your HR/payroll system. HR software often costs more than Software for Payroll alone.
If an employee earns a “exceeds” grade on a quarterly evaluation, for example, you would wish to give them a $500 bonus. HR software with a performance management component may often be linked to an employee’s pay. The compensation data is subsequently sent to the software’s payroll side or to your payroll system.
Software for Managing Performance
Software for Managing Performance is designed to capture the employee’s progress toward goals and contributions to key result areas of the business. Many of these applications tie employee ratings to a numeric value that can be used when determining how much variable pay to provide to an employee. For example, if one employee earns a rating of five out of five, perhaps that’s worth a bonus of $1,000, whereas a rating of four earns only $250.
Zoho People is a low-cost HR software that can manage your variable pay with pay-for-performance features including immediate feedback, monitoring changes in performance, and creating targets. Employees may also rate their coworkers, emphasize their own skill sets, and get feedback from their bosses using Zoho People. Sign up for a 15-day free trial.
System for Customer Relationship Management
A System for Customer Relationship Management like Zoho can be used to track customer data, including customer sales, projects, and feedback. You can then use that data to feed into your variable pay program, such as providing an incentive to employees when their customers renew a contract. Zoho CRM is free for up to 3 users, but if you need more users, you can get a free 15-day trial.
Accounting Software
An Accounting Software like QuickBooks can be used to track customer payments if you want to tie compensation to payments rather than to sales. That makes sense, as you don’t often want to pay out Incentives on income that hasn’t yet been received. QuickBooks also makes it easy to connect bank and credit card accounts, accept online payments from customers, and access key financial statements, including Profit and Loss and Balance Sheets. Try it free for 30 days.
POS (Point of Sale) System
If you need to monitor retail sales by salesperson or food sales by server, a point of sale (POS) system like Square may help. You may then use this information to figure out what kind of Incentives to provide each employee. Because it has a built-in payment processor and company management capabilities, Square POS is ideal for most small firms. It also has no setup expenses. Create a Square account for free.
Consultant in Human Resources
If you don’t use a vendor to manage your variable pay program, you may want to talk to an Consultant in Human Resources or outsource to a labor law attorney to make sure that your variable pay compensation approach doesn’t violate any labor laws. LawTrades is an online legal service provider that will match you with a dedicated attorney to meet your specific needs. Get a free legal assessment.
Features of Variable Pay
A common component of an employee compensation package is variable pay. Incentive payments, bonus payments, and employee recognition and awards are just a few examples. We’ll go through the many sorts of variable compensation and the types of workers each is best suited for.
Incentives
Incentive pay is often used as part of a remuneration scheme to encourage an individual or a team to accomplish a task or achieve a goal. It may also be utilized with workers or contractors in project management environments. It would be conveyed to staff in their offer letter. It would be specified in a contractor’s employment agreement or contract.
Example of Incentive Pay
Let’s imagine a project is expected to be finished by the end of the year, and you need both workers and contractors to remain on board for the length of the project, since mid-project turnover would cause the project to be delayed. You might give a project-end bonus that isn’t paid until the project is finished. In other words, the employees’ pay will fluctuate, and if they don’t resign before the project is completed, their pay will skyrocket.
Ask yourself, “What type of tasks or objectives are most essential for your staff to complete?” to see whether incentive compensation makes sense for your company. Those are the objectives and initiatives you would want to consider incentivizing so that workers concentrate on them first.
It’s important to remember that incentives don’t have to be monetary. They might be monetary or in-kind incentives such as vacations, awards, or gift cards.
Bonuses
Bonuses are increasingly frequent as part of an employee’s remuneration package in performance-based companies. If your firm employs sales or customer service personnel, for example, you may wish to provide variable compensation in the form of a bonus depending on the amount of income each employee brings in. You might also pay depending on variables such as customer satisfaction ratings.
Examples of Bonus Pay
You may pay staff a portion of each sale if your company sells furniture or jewelry. If you own a restaurant, you may provide minor incentives to customers who purchase high-profit menu items. If you own an insurance firm, you may provide a quarterly incentive to the whole staff if your client feedback ratings reach or remain above a specified level (such as four out of five). If you own an HVAC company, you may provide a bonus to an employee who obtains their HVAC license.
“What type of product or service do you want workers to concentrate on?” is a good question to ask yourself when deciding what kind of incentive to provide your staff. Or, more specifically, what critical outcome areas should be recognized?” Those are the ones for which a bonus should be considered.
Rewards & Recognition
Another facet of variable compensation that may be utilized to drive staff to succeed is rewards and recognition. They also have the added advantage of increasing staff retention and engagement. They don’t have to be paid in cash all of the time, however. Rewards, for example, might take the shape of things, services, or points that may or may not be redeemed for cash but have value to workers.
Rewards & Recognition Example
Your IT staff may not be able to sell things, but they may be compensated for areas of their job that they have influence over, such as quality standards, internal customer service, or the number of days the system has been up and running without crashing.
Your warehouse crew may be rewarded for days without a safety violation or weeks without a single customer complaint. Recognition might also serve as a springboard for more rewards. For example, the employee who receives the most positive customer feedback cards in a given month may get a badge and a $100 incentive.
Pros & The Drawbacks of Variable Pay
On the plus side of variable compensation, you’ll probably get more out of your employees than you would with regular pay that doesn’t reward top performers. Variable pay, on the other hand, might be inconvenient if your variable pay compensation structure is too complicated, or it can generate problems if workers believe it is unfair.
Advantages of Variable Pay
There are several advantages to compensating staff on a variable basis:
- High achievers will flourish — Those who perform at a high level will feel more “fair” with variable compensation since they will be reimbursed and recognized for the additional work and higher-level achievements they bring to the company.
- Average performers will be motivated to put in more effort – Employees will be more focused on those areas of their job and work harder to obtain those incentives once they realize the behaviors you value (customer service, safety, and rapid turnaround time).
- Payroll costs will be more closely aligned with company performance – Your payroll will be reduced in months when employees don’t make sales or when your revenues are off since you won’t be paying staff incentives if they aren’t bringing money in the door.
The Drawbacks of Variable Pay
Variable compensation has drawbacks, mostly in the commercial and administrative realms:
- It may be difficult to handle — Tracking variable pay might be difficult unless you have a very basic approach. If you pay your salespeople a weekly bonus based on the number of units they sell, you’ll need to monitor units sold by worker in order to determine each employee’s bonus.
- It’s something you’ll have to budget for — You may have a payroll budget line item that is constant from pay period to pay period. For your variable compensation, you’ll need to do the same. If variable pay is projected to account for around 25% of an employee’s salary, you’ll need to have that much more in your payroll account ready to be paid out whenever it’s earned—whether monthly, quarterly, or yearly. This necessitates making a budget and putting money away ahead of time.
- It might backfire – The most misunderstood disadvantage of variable pay is that it can backfire. What you incent staff to accomplish must be carefully considered. For example, if personnel are rewarded for excellent customer service, may they be “giving away” something to boost their ratings? Or, if they’re rewarded for quicker delivery times, are they willing to compromise on safety?
Eanet also offered the following advice:
Variable pay may impose legal requirements on the employer, and it may need to be taken into account when calculating the employee’s “normal rate” of pay for overtime, sick, and vacation pay.
Variable Pay Alternatives
Many companies don’t fool about with variable compensation, particularly when it comes to occupations like laborers or entry-level employees. In some positions, there may not be much of a distinction between bad performers and excellent performers. Variable compensation is especially uncommon in occupations where customers contribute cash tips, such as waiters or housekeepers, since the tips already act as a variable payment system and incentivize staff to perform well.
Here are some Variable Pay Alternatives:
Cash Tips for Employees
Employees that are likely to get cash tips, such as valet parking attendants, restaurant staff, or exotic dancers, do not need variable compensation from you, the company owner, since they are being compensated for their performance by their clients.
If your staff don’t get tips, you may put up a cash fund, say $200 per month, to give out little random sums. For example, if you witness one employee assisting a coworker, you may offer them a $20 note to pay for their lunch, or give one of your consultants a $5 gift card to get a coffee on their way to the last-minute appointment they took on to assist you.
Feedback from your peers
A fun way to incent employee performance without creating a complex variable pay structure is to invest in a Feedback from your peers mechanism as part of your employee culture. It can be as simple as setting up a Slack channel for workers to provide shout-outs to their peers. Or you could invest in a praise app like Motivosity to allow co-workers to rate and praise their team members. That kind of praise serves to motivate employees to continue doing well (as long as their base pay is fair to start with).
Tenure-Related Pay
Governments and school districts use this strategy. It can make sense if your company prioritizes longevity, such as if you work in academia, science/research, or a skill-based sector and wish to keep your workers’ institutional knowledge. Rather of rewarding workers based on their performance (goals and achievements), you reward those who have been with the company the longest.
Only for the purpose of commission
Only for the purpose of commission is a kind of pay that may be considered variable in the sense that the more product is sold, the more commission is earned. However, commission-only pay provides no base pay. Pure sales roles may be set up as Only for the purpose of commission. However, there are risks to paying workers by commission, according to Angela Nuttle.
Corporate Talent Institute CEO Angela Nuttle
The risk of Only for the purpose of commission is simple: if they don’t get wins, they get discouraged. My business is a relationship-oriented business versus a quick sale product, so the wins are big but it takes time to develop the relationship with a potential client because we offer high-end coaching experiences. There are definitely seasons of spending in the business world, so having a consistent income from commission is not realistic.
Work in Pieces
Some firms pay by the piece, which means that the worker is only paid for what he or she produces. There is no basic salary involved once again. Enterprises that construct objects, such as furniture, and businesses that produce personalized T-shirts or wind chimes are examples. Workers may be paid a set wage per item, such as $2 for sewing a swimsuit or $10 for building a cabinet. This enables the company to clearly link its production expenses to the product.
Read our article on payroll processing for additional information on how to set up your payroll process to perform payroll utilizing these alternative methods of paying workers.
Most Commonly Asked Questions (FAQs)
Here are some of the most frequent questions that small company owners have about variable compensation.
Is it possible for my payroll service to handle variable pay?
Many of the finest payroll services can handle a variety of payment forms. If you currently have a payroll provider, inform your sales or service person that you’re thinking about introducing variable compensation in the form of bonuses, commissions, or other incentives. Inquire about the best way to put things up inside the system you’re currently using. If that isn’t possible, you may be able to manually import data using a CSV file. Alternatively, you may just write in the bonus amounts for each pay month.
What if I want to make a pay structure change?
It’s pretty unusual to set up a variable pay system only to discover that it doesn’t work out as planned. If you compensate staff based on their sales, for example, you may discover that customer service worsens and profitability falls.
Consider the benefits and drawbacks of your present compensation structure to determine whether changing it may enhance the key performance indicators for your company. Then, in the same manner you conveyed your initial variable compensation scheme, consider re-communicating the new structure in your employee offer letter, employment contract, or employee handbook.
What Happens If My Variable Pay Is Lower Than The Minimum Wage?
Variable compensation is usually paid in addition to base pay. If not, you’ll need to make sure you’re following your state’s minimum wage rules.
Final Thoughts
Employers might use variable compensation as a strategy to encourage employees on the job. Employees are more likely to be engaged if they have a stake in the outcome. They have more opportunities to raise their own compensation the harder they work or the better they perform their job. When creating a compensation plan for your team, variable pay might be a terrific option.
Gusto, an integrated HR/payroll service, can help you manage your variable pay program with ease. It also saves all of your employee documentation, allows workers to self-onboard online, and automates numerous payroll duties. Try it out for free for 30 days to discover whether it’s right for you.
Gusto is a great place to visit.
Variable pay is a type of pay that amounts to different wages for different tasks. It’s also known as piecework or job-based pay. These are the advantages and disadvantages of variable pay. Reference: variable pay advantages disadvantages.
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