Five Tips for Developing a Variable Pay Plan Design

Okay, so you’re ready to develop and implement a variable pay plan, one that will help you reach your strategic business goals?  This pay plan is also a complementary tool to help attract, retain and reward the employees who will help you reach your goals.

1. It is never too early to begin planning. Just as people plan major vacations months in advance, (where you are going, what to pack, how to get there, what it will cost, who’s going, etc.), so it is with variable pay plan design and communication. While the planning phase may take months, the actual implementation should be relatively short and focused; just as execution of the vacation takes place over a fixed period.  
2. Spend about 25 percent of your time on variable pay plan design details and the other 75 percent on communication and training plans. Too often we see the reverse in practice.  Pay success is not primarily about the end dollars received – in fact, it is rarely about the amount, but more about the perception of the message and delivery.  Understanding the plan leads to acceptance.  Employees want to know how, when, where, etc.  So be sure you have well-designed communication tools.  If you already have a variable pay plan, make sure your employees know all about it and reinforce its importance to strategic goals and shared successes. 
3. Variable pay plan designs should be simple to understand and clearly communicated to all the staff. Don’t explain the “rocket science” and regression-analysis detail—that is not necessary in most cases—or if there are complicated elements, teach your employees what these are and how they affect achievement. A clearly communicated plan can also help avoid disputes about pay under the plan.  Be as specific as you can about what they can do.  Everyone has a role in the success; just as the old adage states, ‘what gets rewarded gets done’.  Test your communication with a diversified test group to learn potential questions, and address these proactively via a written Q&A. Consider consulting with counsel to make sure the plan is clear and will not lead to legal issues.
4. Extra instructional time should be provided to managers and supervisors. At the end of the training, managers and supervisors must be able to easily explain and define plan objectives, purposes and employee goals (as necessary), what the pay implications are and what they mean to employees. The front line managers and supervisors are your variable pay plan sales people and, as such, greatly affect its acceptance and ultimate success.  During the plan cycle, spend some time on calibration meetings with managers to hear how well the plan is truly understood and received. Employees should receive updates, at least on a quarterly basis, and communicate the measures against results.  If there is not going to be a payout, then employees shouldn’t be surprised.  They should also know where to focus extra efforts in hopes of achieving the stated goal; or at least the threshold.  By enlisting your front line, you earn their engagement.  Think this step takes too much time?  Calculate the cost of managerial training as a percentage of the payout cost, and you will find it to be an affordable fraction. 
5. Plan designs are as variable as snowflakes. Set thresholds, but avoid capping them if possible. Test all payment possibilities through the design phase and at various levels.  What is the possibility and potential for superiority?  Extraordinary events are rare, but there is little value for putting a lid on dreams.  Some employees aim for the fence; some consistently get on base.  Decide your strategy and be sure what you are rewarding.