Definitions of variable pay

The Workplace Employee Relations Survey (Kersley et al, 2006) defines variable pay as having three main forms performancerelated, profit-related and employee share schemes. The CIPD (2006) defines it as the practice of paying an amount of pay in addition to or instead of base pay as part of an employees total remuneration which varies according to criteria.

Forms of variable pay

Incentive pay Bonus Commission Payment by results (PBR) Merit pay Individual contingent pay Performance-related pay Pay for contribution

The dimensions of variable pay

What is being measured? Inputs or outputs? What period of performance does the payment reward? Short-term or long-term? Does the payment reward an individuals performance, or does it relate to team or organisational success? Is measurement based on a single or on multiple factors? What form does the reward take? Cash, shares, or non-financial reward?

Major categories of variable pay

Individual results-based schemes (eg piecework, sales commission) Team-based rewards Collective short-term incentives (eg gain-sharing, profit-sharing) Collective long-term incentives (eg employee share schemes)

Types of variable pay

Work-measured schemes
These are the most common form of results-based incentive in production industries. In work-measured schemes the job or its component parts is timed and a standard time set for completion of the task. The incentive is related to the worker exceeding this standard time target for the task.

The British standard scale of rating

Team-based rewards
Team rewards consist of payments or non-financial rewards provided to members of a formally established team. They are linked to the performance of the team as a whole, and are awarded in addition to the individual pay received by each member of the team.
Armstrong (2000)

Types of teamworking
Process teams Parallel teams Project or time-based teams

Collective short-term rewards

Profit-sharing Two main types of scheme: cash schemes and stock option schemes. WERS 2004 found that 30% of workplaces had some employees in receipt of profitrelated payments or bonuses. Gain-sharing A scheme whereby the organisation seeks to share the financial benefits of any improvements in productivity or performance with the workforce.

Collective long-term rewards

Collective long-term rewards are those that reward organisational performance, but where the receipt of the reward takes longer than 12 months (Shields, 2007). The main form is the employee share ownership scheme, where workers own shares in their employing organisations. Either employees are given shares or they have the option to purchase them.

UK share ownership schemes

Share Incentive Plans (SIPs)

Savings-related schemes
Enterprise Management Incentives (EMIs) Company share option plans (CSOPs)