What Is A Variable Compensation Plan?

What Is A Variable Compensation Plan

Everything is moving faster and quicker all the time. Businesses are expanding rapidly, contemporary innovation is outpacing future development, market demands change regularly, and daily life evolves.

These events are also connected with individuals’ changing desires and expectations, both privately and in the workplace.

A variable compensation plan rewards employees based on their individual or team performance in this context. This can be through bonuses, commissions, stock options, or other incentives.

Variable compensation plans can be a great way to motivate employees and improve company performance. But they can also be complex and difficult to administer. So what should we know about a variable compensation pay plan?

Read on to find out!

What Is Variable Compensation?

Variable compensation, often known as variable pay, is a form of incentive paid on top of a base salary intended to encourage and retain staff. Employee performance is the basis for variable pay. When an employee reaches or surpasses their target, variable compensation helps to increase their earnings.

How Do Variable Compensation Pay Plans Work?

Variable compensation pay plans usually have three components: a goal, a metric, and a payout. Whenever an organization has a goal, a metric determines whether it has achieved that goal. A payout is what the employees will receive if they successfully achieve the goal.

For example, a company’s goal is to increase sales by 10% over a year. The metric they choose to measure this could be the number of sales made, the total value of sales, or the profit margin on sales. If the company meets its goal, the employees who contributed to that success will receive a bonus.

Benefits Of Having A Variable Compensation Plan:

There are many benefits to having a variable compensation plan for employees and employers.

A variable compensation plan can motivate employees to perform well and achieve goals. Taking responsibility for their success or failure motivates them to strive for more. And it can provide financial security and stability since employees will know that they will be compensated for their efforts.

For employers, a variable compensation plan can help to improve company performance by aligning employees’ goals with the company’s goals. Competitive compensation packages also make recruiting and retaining top talent easier. 

After all, employees will be more likely to stay with a company if it offers competitive benefits. Finally, it can help to reduce costs since employers will only have to pay out bonuses if employees meet or exceed their goals.

Drawbacks Of Having A Variable Compensation Plan:

There are some drawbacks to having a variable compensation plan.

A variable compensation plan can create pressure and stress for employees since they will constantly strive to meet goals to receive a bonus. It can also lead to resentment if some employees feel like they are not fairly compensated for their efforts.

A variable compensation plan can be difficult and expensive to administer for employers. It can also lead to employees gaming the system by focusing on the wrong goals or metrics. And it can create tension and conflict between employees and managers.

What Are Some Examples Of Variable Compensation:

There are many different types of variable compensation that employers can offer to employees. Some common examples of variable compensation include:


A bonus is a one-time payment given to an employee based on their individual or team performance. For example, an employee who meets or exceeds their sales goals for the year may receive a bonus.


A commission is a type of variable compensation paid to an employee based on their performance in selling a product or service. For example, a salesperson who sells a high-priced item may receive a higher commission than someone who sells a lower-priced item.

Stock Options:

Stock options are variable compensation types that allow employees to purchase company stock at a set price. This can be an extra incentive for employees to stay with the company for longer.

Other Types Of Incentives:

There are many other incentives that employers can offer to employees as part of a variable compensation plan. Common examples include vacation days, gift cards, and paid time off.

Challenges Of Administering A Variable Compensation Plan?

There can be some challenges associated with administering a variable compensation plan. Some of these challenges include:


Variable compensation plans can be complex, and it can be difficult to administer them effectively.


If not administered properly, variable compensation plans can create inequity among employees. For example, if two or more employees have the same job but one employee has a higher sales goal, that employee may receive a larger bonus than the other employee.


Variable compensation plans can be costly to administer, and they may not always be cost-effective.


Variable compensation plans may not always effectively motivate employees. As an example, if an employee does not believe that they will be able to meet their sales goals, they may not be motivated to try.

Despite these challenges, variable compensation plans can be a great way to motivate employees and improve company performance. When designing a variable compensation plan, it is important to consider these challenges and create a plan that will work for your company.

Why Companies Are Switching To A Variable Compensation Plan:

There are several reasons why more and more companies are switching to variable compensation plans. Variable compensation plans can motivate employees to improve their performance and reach specific goals.

They can also help attract and retain top talent. They can be a more cost-effective way to compensate employees than traditional salary or hourly pay.

Making the switch to a variable compensation plan can greatly improve company performance and attract and retain top talent.


A variable compensation plan is a great way to motivate your employees and keep them engaged in their work.

When you create a variable compensation plan that rewards your team for meeting specific goals, you allow them to earn more money based on their hard work and dedication.

When it is implemented correctly, it can increase productivity and better results for the company.

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