Feature

Variable pay: impact on productivity

Tanu Talwar analyses how the variable pay system improves employee performance.

With the IT business environment becoming increasingly competitive, companies are aggressively aiming to derive the maximum from their employees. One of the widely deployed practices among corporates to pump up an employee’s performance is the adoption of the variable pay system. This system largely implies a pattern where the employer divides an employee’s salary into two parts—fixed and variable, whereby the fixed part of the salary is credited to an employee every month and the variable aspect follows as per the goals and targets achieved.

The trend owes its popularity to the fierce competition in the industry and the desire among corporates to pay as per productivity. While the fixed component of the salary represents the average sum an employee is paid for doing his job, the variable portion of the pay comprises the incentives and rewards given to him for his exemplary performance by implementing tasks and achieving beyond expectation.

Almost all IT companies today have some kind of variable payment scheme in place. Leena Agashe, HR Manager, Ensim India states, “Pay for performance, pay for the person, and pay for the position can be achieved through the variable pay structure. Depending upon the effectiveness of an individual for a given business and to bring in discipline in terms of rewarding a performer and penalising a non-performer, IT companies are increasingly opting for the variable system.”

The main idea behind which a large number of IT companies are seen to be adopting the system is that the process is considered to trigger off better performance. J Kalyanaraman, Senior VP, Human Capital Management, HCL Comnet, says, “The system is deployed to enhance productivity of the workforce by acting as a differentiating factor. From an organisation perspective, the variable pay allows directing individuals towards the short-term goals of the company. From an employee perspective, variable salary system intensifies his performance and gives him an opportunity to get recognised for his efforts and initiatives.” Besides ensuring a performance driven work culture in the organisation, the system is widely effective in employing and retaining the best talent available. Indrakumar, Manager, HR, Ntrust Infotech, reveals, “The idea is to retain the top and exceptional talent available with the company by giving them additional incentives and increased salaries than offered in the market. The variable component in the salary helps achieve this target.”

Determining the ratio

"At the lowest level we have a ratio of 80:20 with 80 serving as the fixed pay. There are also instances of no ceiling on the variable pay" - Abhay N Rao VP, HR Kenexa

The key factors that determine the proportion of fixed and variable components are the levels in the company, skills functions, years of experience and the designation that the person holds. While the percentage of the variable component is higher at the top level, the system is gradually finding space in the lower levels of most organisations. The idea is to give the employees at a lower end a chance to prove their merit by boosting their performance, and getting rewarded via a share in the company’s profit through the variable scheme of pay. Abhay N Rao, VP, HR, Kenexa, explains, “At the lowest level we have a ratio of 80:20 with 80 serving as the fixed pay. However, there are also instances of no ceiling on the variable pay, with salary linked solely to results. Such an arrangement gives employees an opportunity to earn up to two-three times their constant pay.”

The ratio of fixed and variable components in the pay varies from company to company. Sanjeev Kumar Rana, HR Head, SDG Software, states, “The ratio of variable and constant salary components, as a norm, varies based on the role an employee plays and the more senior a person is, the more his compensation becomes variable.” However, the thumb rule is that the direct revenue generating departments like the sales, senior management and distribution have a higher variable salary component than the non-sales sections. Though in some organisation a ratio of 60:40 is followed in the sales department, in others 30:70 is deemed fit. However, in the non-sales, lower level departments a ratio of 80:20 is considered to be ideal while in the senior management division, whereby the performance and the decisions of the executives have a direct long-term impact on the future of the company, the compensation through variable payment may exceed twice the fixed pay.

The parameters for this differentiation is considered to be the fact that the variable pay is directly proportional to the level or responsibilities of an employee and the contribution he makes to the growth of the organisation. As it is viable to measure performance against the revenue in the sections that have a direct bearing over it, than in the routine tasks where the link to the final result cannot be well-established, variable system is more productive in the sales and higher administration levels. Sanjeev Kumar Rana adds, “The sales division is easier to be bought under pay for performance system as it is easier to set quantifiable objectives and can also be more objectively assessed based upon the performance, other entities such as staff functions where the duties are of regular nature and performance cannot be measured in terms of figures and deadlines, may not be easily enrolled in the flexible system.”

Measuring performance

With performance determining the percentage of constant and the variable portion of the salary, the question that comes to mind is that on what grounds is it evaluated upon. Almost every IT company today has a well-defined annual, or in some cases quarterly appraisal programmes in place. A popular performance based appraisal procedure is the 360-degree appraisal model followed across numerous organisations. “We follow a 360-degree performance evaluation approach called the Newgen Performance Management System, which focusses on self-determination and self-assessment. It urges employees to take up ownership of performance, planning and achievement,” says, S J Raj, Vice-president, HR, Newgen Software Techno-logies. These programmes are designed to manage and enhance employees’ performance through a continuous process of feedback, coaching and counselling.

"We follow a balanced scorecard approach where every individual has a scorecard determined at the beginning of the assessment period" - TN Hari VP and Global Head of HR, Virtusa

Apart form this, companies have other customised performance systems in place. TN Hari, VP and Global Head of HR, Virtusa, states, “We follow a balanced score card approach where every individual has a scorecard determined at the beginning of the assessment period. The scorecard is constructed around broad areas where individuals are expected to make a contribution.” These broad areas cover increasing clients, enhancing employee relationships, community service, and most importantly, the completion and success in functional responsibilities area.

Awarding outstanding talent

Though all organisations ensure salary hike through the regular appraisal schemes, these hikes do not provide adequate reward for exemplary performance. With the motive to provide salary incentives to all, these plans fail to acknowledge the outstanding talent. It is to fill this gap in the system by providing additional incentives to the star performers that one finds variable payment system becoming widely accepted.

The key benefit of the variable system is that it encourages employees to achieve beyond work targets by providing immediate incentives for enhanced performance. Leena Agashe, explains, “As the form of payment is directly linked with goals achieved it acts as a performance enhancer as it keeps employees aware and alert of his responsibilities. It encourages the personnel to meet their deadlines and targets, thus avoiding sleeping over work.” The procedure not only helps to integrate organisational and individual goals but also differentiate between the potential and the average employees on the basis of differing levels of performance. Further, the system gives an employee the opportunity to maximise his cash flow, at times even earning beyond his defined salary for over-achievement.

Another reason for organisations going in for flexible pattern of payment is to bring down the fixed cost. Rao explains, “Salaries form a big chunk of fixed cost and linking these up with results and targets ensures that the companies can be in control of the situation as they pay according to performance.” Even though the variable pattern of payment is more expensive for organisations performing well, they do not mind the expense as they are in a much better position to bear the cost and are keen to acknowledge the efforts of their employees. On the other hand, the system turns out to be an expense saving plan when the organisation is not doing well as it lowers the variable compensation in the salary, thus bringing down the fixed cost.

The flip side

However, the flip side of the coin reveals that if handled incorrectly, the system could be a major cause of discontentment among the employees. Even though companies urge that performance is the key factor determining the ratio of variable component, the areas covered while fixing the final ratio clearly state that performance is not the sole criteria for the differentiation in the flexible salary outlay. Besides performance, many a times the HR managers consider other aspects like educational qualifications, experience, availability, hours spent and inter-personal skills before drawing the final draft. For example, in an ITES sector set-up, attendance is a very critical parameter, it is even more so in an inbound campaign. At the same time, the initiative might not be a well liked ability because the employee is supposed to stick to the brief given by the client. Amit Azad, Head of Operations and Finance, Finesse PR, explains, “In such times, most HR managers tend to go wrong by evaluating “hard work” with the number of hours an employee spends beyond his normal working hours. This is an entirely wrong practice and is rather an “hardly working” practice.”

This practice of awarding employees who keep late hours tends to create an unfavourable environment. As employees are judged not on their capabilities but on their physical presence, it puts unnecessary pressure on every person who is efficient and is able to manage his time better and do work effectively. By awarding such a practice, the HR managers sooner or later understand that they are awarding inefficiency and not dedication.

Moreover, every company has a different way to evaluate performance, while in some individual hard work counts in other it’s the team effort that is noticed. In organisations where the HR managers uphold team performance, at times the individual suffers and feels cheated. Azad asserts, “Awarding team effort can cause interpersonal problems to arise as the individual may feel that factors out of his control such as the late delivery of components from other teams are affecting his work.” However, the other school of thought is that if an organisation goes on rewarding individuals then it is creating “star performers” and not “star teams”. Moreover, by measuring appreciation in monetary terms, employees tend to become aggressive and aim at achieving short-term goals to get immediate benefits thereby ignoring their all round development.

Communication—the way out

The solution is to maintain clear and good communication across the organisation. In all probabilities the problem is not in the system or in the plan, but in its implementation and its measurement. Most of the times there is no clarity on the variable structure. The parameters are vaguely communicated and weightage is seldom disclosed. T N Hari says, “The key to the problem is to have effective communication and be sure that the employees have no doubts about the functioning of the variable pay pattern.”

The managers need to be very clear about the evaluating guidelines and should be in consultation with various functional heads to assign importance for different functions and accordingly assign weightage. Besides communicating the system any change in the pattern should also be immediately conveyed. J Kalyanaraman, states, “The variable pay pattern must be designed in such a way that there exists a complete transparency in the system. To ensure this we have a company website where the employees can view their structure online. Furthermore, the managers should not exercise favouritism while appraising their subordinates.”

ec@expresscomputeronline.com