The document discusses variable pay, including: - Variable pay aims to reward employees for objectives and results beyond regular job responsibilities, while fixed pay compensates for day-to-day work. - There are three categories of variable pay: incentives, bonuses, and recognition. Incentives are tied to pre-determined criteria while bonuses are for completing specific tasks. Recognition is more subjective. - An effective variable pay program is linked to business objectives, has clear purposes and performance measures, and considers factors like eligibility, funding, and implementation. - In India, the ratio of fixed to variable pay is shifting, with variable pay expected to increase to 25-30% on average from the previous 10-

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Presentation
START

6. 6W of Variable Pay will be discussed…

8. Difference Between
Variable Payment
and Fixed Payment

9. Fixed Pay Variable Pay
Orientated to compensate for
day to day responsibilities
and ongoing performance
Recognizes long-term
contribution
Factors in Skill/Competency
development
Aimed at rewarding special
objectives and results ( e.g.
increased productivity, cost
reduction)
Rewarded for “Above and
Beyond” expected, regular
contributions
Drives strategic innovations

10. Basic Concept of Variable Pay
Characteristics of Variable Pay
 Payouts typically in lump sum cash or stock-
related awards
Does not permanently increase fixed salary, but
may be included in benefits determination
Must be re-earned each year
Typically includes participation of a large segment
of the employee population below the executive
level

11. Three Categories of Variable Pay
Incentives Bonus Recognition
 Criteria determined in advance  Completion of a specific task  Criteria broadly defined and
subjective
 Amount of payment can vary
 Monetary or non- monetary
 Self-funded or budgeted
 Nondiscretionary
 Amount determined in advance
 Monetary
 Budgeted
 Nondiscretionary
 Awarded spontaneously
 Decision made after the fact
 Focused on behaviors
 Monetary or
Nonmonetary
 Criteria determined in advance  Completion of a specific task  Budgeted
 Amount of payment can vary
 Monetary or non- monetary
 Self-funded or budgeted
 Nondiscretionary
 Amount determined in advance
 Monetary
 Budgeted
 Nondiscretionary
 Discretionary
 Criteria determined in advance  Completion of a specific task  Criteria broadly defined and
subjective
 Amount of payment can vary
 Monetary or non- monetary
 Self-funded or budgeted
 Amount determined in advance
 Monetary
 Budgeted
 Nondiscretionary
 Awarded spontaneously
 Decision made after the fact
 Focused on behaviors

12. Bonus Plan Types
Referral bonus
Hiring (sign-on) bonus
Retention (stay) bonus
Project completion bonus

13. Significance of variable pay in compensation
Management
• Progressive organizations are seeking alternative pay
methods to both maintain cost controls on overall
compensation expenses and increase employee
performance and productivity.
• One possible alternative is variable pay for
performance, a method of paying employees for
successful attainment of specific sales performance
objectives.
• Variable pay design can include incentives for
achievement based on individual performance, group
performance and/ or company performance.

14. Five conditions indicate a need and environment where
incentive programs work best
 Current performance on specific work goals is inadequate.
 The cause of the inadequate performance is motivational
(rather than due only to a lack of knowledge and skill or to
environmental barriers).
 The desired performance type and level can be quantified
(how much, how often, how many).
 The goal is challenging yet achievable (easy goals are not
appropriate).
 The organization requires that all other performance goals
continue to be achieved at or above current levels.

15. Linking Variable Pay to Business Objectives
Desired Business Goals→ Business Strategy→
Staffing/Org. Requirement→HR Strategy→
Total Rewards Plan→Variable Pay
• “The society has similar companies which employ
similar workers, who have a similar educational
background. They do a similar kind of work, have
a similar way of thinking, a similar price and
quality, create similar products and do similar
things.”

16. Threshold Growth Maturity Decline
High Total Fixed Pay STI(Sho
rt term
Investm
ent)
STI,
LTI(Short
and long
term
investment)
STI(Short
term
Investment)
Medium Short Term
Investment
TFP(Tot
al Fixed
Pay)
TFP(Total
Fixed Pay)
LTI(Long
term
Investment)
Low Long Term
Investment
LTI(Lon
g term
Investm
ent)
TFP(Total
Fixed Pay)
Variable Pay helps to achieve Business Objectives
Focus, Alignment, Motivation, Reinforcement.

17. Total Rewards Model

18. Designing Variable
Pay Plan

19. Purpose &
Objectives
Performance
Measures
Award/Payout
Mechanism &
Opportunity
Eligibility &
Participation
Funding
&
ROI/ROE
Program
Implementation
Special
Issues for the
Program to
Address
Program
Management
& Assessment
Elements in the Design of Variable Pay Programs:

20. Pre-Design
• Ÿ Considering internal and external
factors
• Ÿ Obtaining management support
• Ÿ Identifying the design team
Phase 1

21. Internal Factors
• Ÿ Organizational readiness
• Ÿ Costs/resource availability
• Ÿ Timing

22. External Factors
• Ÿ Labor market
• Ÿ Competition
• Ÿ Geopolitical
• Ÿ Legal/regulatory
• Ÿ Technology

23. Variable Pay Effectiveness Model

24. Issues to Consider
• Is the organization ready for a new or revised variable
pay program?
Costs/Resource Availability
• Ÿ Implementation costs
• Ÿ Funding
• Ÿ Compliance
• Ÿ Support staff
External Factors
• Ÿ Labor market
• Ÿ Competition
• Ÿ Geopolitical
• Ÿ Technology
• Ÿ Legal/regulatory

25. Obtaining Management Support
• Ÿ Determine buy-in early
• Ÿ Begin at a high level
• Ÿ Utilize allies
Identifying the Design Team
• Ÿ Considerations for an in-house design
team
• Ÿ Advisory group alternative

26. Phase 2
Design
• Ÿ Determining plan objectives and plan type
• Ÿ Defining eligibility
• Ÿ Selecting performance measures
Determining Plan Objectives and Plan Type
• Ÿ Directly address business objectives
• Ÿ Limit the number of objectives
• Ÿ Use SMART objectives
• Ÿ Select a plan type that supports objectives
• Ÿ Examples

27. Defining Eligibility
• Ÿ Level at which performance is measured
• Ÿ Participant line of sight
• Nonparticipants
• Ÿ Individual criteria
Level at Which Performance Is Measured
• Ÿ Organization wide
• Ÿ Organizational unit
• Ÿ Team
• Ÿ Individual

28. Participant Line of Sight
• Ÿ Employee’s perception of influence
• Ÿ Short line of sight vs. long line of sight
• Ÿ Employee/management
Selecting Performance Measures
• Ÿ Identify performance drivers
• Ÿ Establish performance measures
• Ÿ Determine if there are single or multiple
measures

29. Quantitative Measures
Financial
• Ÿ Volume/profit
• Ÿ Aggregate/end-result level
• Ÿ Limited interim process feedback
• Ÿ Strong indicator of past performance
Operational
• Ÿ Day-to-day data
• Ÿ Measure effectiveness
• Ÿ Identify key processes
• Ÿ Reflect value to customer

30. Overview of the Key Decisions for Long-term Incentive
Compensation Plan
Purpose &
Objectives
(Why)
Overall
Approach
(How)
Award
Guidelines&
Opportunity
(How Much)
Eligibility
(Who)
Source of
shares,
Vesting,
Liquidity
& Tax
Treatment
Program
Implementation
Special
Issues, Terms
and
Conditions
Program
Management
& Assessment
Long-term Incentive Plan

31. # of Units x $ Value of Units = LTI Payout $$$
Long-term Incentive Plan
 The program will exist for the term of the expansion project and may be
renewed or modified based on business conditions and strategic imperatives.
This is estimated to be 5 years.
 The company will establish key goals and milestones associated with the
expansion plans and award individuals “units” based on the achievement of
these goals. This will be done on an annual basis.
 The units will be valued based on the successful completion of the expansion
plan and the successful performance of the company. The units will be valued at
the end of the performance period.
 At the completion of this performance period (as defined by the expansion
project plan and approved by the Board), the eligible individuals will receive the
LTI payout awards.

32. Program Duration
 The longer the incentive program’ s duration, the
greater the impact:
 Short-term programs of one week or less yielded a
20% performance increase.
 Six-month (or fewer) programs yielded an average
29% increase.
 Programs extending beyond one year produced an
average 44% gain.

33. Realigning Fixed and variable pay in
compensation structure:Indian
Scenario
According to hiring major ‘Ma Foi management
consultants,’ the variable pay component in India is
likely to go up to 25-30 percent on an average from
10-15 percent. The ratio of fixed to variable pay in
compensation structure, depends on the level of the
employee in an organization, the responsibility
attached to the job and the role an employee plays.

34. The new economy sectors like IT, banking,
insurance and back-office jobs where employees
engaged in sales activities, usually have a larger
variable pay than the employees in execution
roles. After the recession, the traditional or old
economy sectors like manufacturing and oil and
gas too have started changing their pay structure
from the earlier 100 percent fixed format to mix
of fixed and variable pay. Hewitt Associates,
conducted ‘14th annual Salary Increase Survey’
in March 2010 covering 465 Indian firms across
20 primary industries and 27 sub-industries.
According to the survey variable pay as par t of
total compensation continues to grow with
executive getting 24.8 percent and lowest rung
officer cadre getting 11.3 percent of their salary
in variable compensation.

35. What will be the ideal range of
Fixed and Variable pay in total
salary ?
• Average Remuneration Break-up:
Fixed-62%
Varable-38%

36. Ratio of Variable Pay