We all know about incentive pay or the incentive scheme. It was initially designed for sales and marketing people where the performance of the employees is mostly measurable. You can measure the performance of these departments in actual numbers. For instance, you can judge the number of leads converted by one sales executive and check the business generated from these conversions.
However, it was not possible to use this method for every department and employee of the company. For instance, it was not possible to evaluate how much business an HR manager generated.
But, the emergence of technology has made it easier to evaluate the performance of every employee through analytics. This medium increases the flexibility of implementing an incentive scheme for every company department.
Apart from the incentive scheme, companies also use variable pay, which considers several performance factors to evaluate the variable compensation of the employees. It is often calculated based on employees’ performance and business performance.
Different office settings are using both of these schemes to reward employees. That’s why HR managers are often confused about whether to use variable pay or incentive schemes or use both.
This article will help you evaluate which scheme is best for your organization.
Comparing Variable Pay and Incentive Scheme
The incentive scheme is based usually on the performance of the employee. But, variable pay is aligned to the company’s performance in a region, country, or state.
Since it is now easier to evaluate the performance of the employees, incentive schemes are more popular. It provides flexibility to offer benefits based on the performance of the individual employee. That is the reason why employees prefer incentive schemes more because they know their hard work would pay.
You can disburse incentive scheme monthly, every 6-months, or annually. It depends on the performance targets that your employees are achieving and how soon they can make these targets. For instance, sales executives usually have quarterly targets, so they get incentives every quarter.
On the other hand, the distribution of variable pay is at the end of the year by evaluating the performance of the company.
Incentive schemes can be designed for a financial year, different quarters, or even months. You don’t have to consider the joining date of the employee. But, since variable pay is the part of the CTC, you need to consider the employee’s performance from the date of joining only.
You can increase or decrease the incentive amount based on the company’s needs and employees’ performance. But, you can’t change the variable pay because employees are made to believe that this is their right.
You can mainly launch an incentive scheme specific to a product. Your team will be on their toes to achieve the best and make better sales. That cant is achieved with variable pay and we don’t even need to explain why.
When you deny variable-pay, it is evident that your company is not performing well. Which discourages employees and also increases employee turnover. You can’t stop the employees from getting de-motivated.
But, incentive pay is base on the performance and business generated so that you can be fair in your methods.
Variable pay is the part of the CTC, which means with every appraisal, the variable fee also increases. That is not the case with the incentive pay. It grows when your employees are only performing exceptionally well.
Variable pay is not transparent as the calculation method is unknown to employees. It is ambiguous as employees can’t raise questions even when they are not satisfied with the variable pay. But, incentive pay is transparent, and it is possible to calculate the incentives which motivate the employees to achieve more.
Employees can negotiate the variable pay, which allows them to increase their total CTC. Which is not possible in case of the incentive pay.
Both variable pay and incentive pay are essential for the industry. Different use-cases use both these methods. You only have to judge what is more important to your organization and implement that structure. You can even use both types for various departments of your business. Evaluate the needs of your employees and structure your rewards scheme.