Variable compensation is a popular method of rewarding employees because it connects their work with the overall success of their company. When employers reach or exceed their financial goals, they pay a bonus to their workers to support their productivity. There are different types of variable pay plans. Companies can pay bonuses to highly productive individuals, to teams of workers, or to all workers according to the performance of the entire organization. Variable compensation includes several types of programs including incentive payments, bonuses, and recognition rewards. The purpose of this study is to analyze the benefits and drawbacks of variable compensation systems as a mean of employees’ motivation.
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Variable compensation is very common in big and small companies all around the world. Employers understand that a big base pay is a good motivation to keep workers’ productivity on a high level, but it is not enough to achieve better results. Therefore, companies use several variable pay systems to reach and exceed their financial goals. Organizations can use individual approach, assess teamwork or the performance of all employees in allocating compensations (Gerhart & Fang, 2015). The compensation systems include incentive payments, bonuses, and personal recognition.
Incentive pay plans allow employees to receive more money according to their performance parameters. Companies usually give their workers a list of rewards and punishments that motivate people and warn them against inappropriate actions. Therefore, employees can achieve different goals and receive variable payment. It is very important for workers to know that they have multiple opportunities to enhance their base pay. Moreover, they become aware of possible dangers in their occupation. They can always choose between their goals to ascertain their extra payment. Different salaries allow workers to evaluate their strategies at work.
The bonus system is a different type of variable compensation. Companies set particular goals and bonuses for all workers. The amount of possible extra payment is predefined and presented as a major opportunity to receive more money at work. Individual workers or teams can compete with each other to achieve bonuses. The main difference of bonus systems from incentive payments is predefined nature of the reward. Incentive programs allow workers to achieve little or big money according to multiple performance parameters. Bonus systems do not present this variety of choices. Employees achieve certain goals and receive bonuses, or they fail and get nothing. Bonuses are generally bigger than incentive payments what allows for higher competition among employees. Nevertheless, some workers prefer to receive regularly little rewards for their work instead of rushing for the big prize.
Personal recognition is very different from the two previously mentioned variable pay systems. Companies can motivate their employees by various gifts and privileges. In this case, it is not the amount of money that matters, but the attention of a company to its workers. The nature of recognition and its amount can change from month to month, but it is a more personal approach that is valued especially by senior workers (Ljungholm, 2014). People like to receive not only money but also gratitude from their employers.
Variable pay systems can vary in their approach, but all of them motivate workers to achieve better performance rates. Companies can set goals for individuals, teams, and all their workers. Incentive payments allow employees to choose between these goals and receive payments according to their performance parameters. Bonuses usually predefine the number of extra payments. Personal recognition uses an individual approach to show how companies value their employees. All of these variable pay systems can serve as a good motivation for workers when they are combined with good base pay, professional support, and health insurance.
Gerhart, B., & Fang, M. (2015). Pay, intrinsic motivation, extrinsic motivation, performance, and creativity in the workplace: Revisiting long-held beliefs. Annual Review of Organizational Psychology and Organizational Behavior, 2(1), 489-521.
Ljungholm, D. P. (2014) Intrinsic motivation among public sector workers. Geopolitics, History and International Relations, 6(2), 7-12.