Of all the uncertainties faced by organisations in the past year, one of the most common and concerning questions for leaders has been how to get the reward balance right.

Many businesses are cash strapped and facing disrupted or entirely novel distributions in workload, but the need to engage and retain your best people is still there. And reward is one of the key levers leaders can pull in pursuit of this goal.

In particular, our research shows that over the next 6-24 months, organisations will focus more on variable pay (short-term incentive and bonus pay). But before organisations spend money on variable pay, they need to be sure their programs are optimised to get the best return on their investment.

The power of variable pay

Variable pay plans are critical for retaining key talent, embedding new skills and behaviours, communicating strategy and driving organisational transformation during periods of economic disruption and uncertainty. It packs an incredibly strong emotional punch that can be invaluable to employers in times of crisis.

Variable pay packs an incredibly strong emotional punch that can be invaluable to employers in times of crisis. Click To Tweet

One of the key features of good variable pay plans is that they incentivise remarkable contribution. This is particularly important for organisations anticipating business shifts. As business priorities are reviewed and realigned to changing consumption and investment patterns, reward programs should mirror these shifts.

These changes will of course materially impact what and who variable pay plans will reward, and how it should be funded. But organisations need to go beyond the numbers to consider exceptional cases like new strategic areas of growth which may not be profitable early on.

Responsibly wielding the power of incentives

Within the current COVID-19 landscape, bonuses are difficult to predict. This is particularly so in businesses where most roles are heavily financially incentivised, as they are in areas like sales. In many cases it’s impossible for people in these roles to hit the targets required to achieve their bonuses.

In other businesses, disrupted economic conditions have meant increased work – and in some cases, increased risk. This has seen some industries providing unexpected bonuses for workers. For example, some companies are offering frontline workers a bonus on top of their usual hourly rate in recognition of the extra effort workers are contributing and the increased risk they’re being exposed to.

The emotive power of variable pay means that it needs to be implemented correctly with clear and fair rules. If not, these programs can do more harm than good. Take temporary and part-time workers: if these workers are excluded from variable pay programs, a sense of disparity and unfairness within employee groups can emerge.

Nine ways to optimise variable pay design

 As conditions continue to change rapidly over the coming months and years, organisations are likely to have to react by making frequent adjustments to their variable pay plans. When doing so, it’s vital they communicate these changes effectively, keeping people informed of what is changing and why.

We’ve identified nine critical focus areas for optimising design. Here are three key areas to get started with.

1. Is it easy to understand?

Plans that have the strongest impact are those that can be quickly and easily communicated, have three or fewer measures, and involve regular progress updates. This requires transparency on measures so that individuals can continually track where they’re at and alter their performance accordingly.

2. Does it align with organisational priorities?

The greatest opportunities for value delivery are created when plans directly align everyone with the individual/team/unit goals and the business’ strategic objectives.

3. Is it fair?

Good plans consider fairness through both an internal and external lens. They need to reinforce the organisation’s reward philosophy while also being legislation compliant, and taking account of market pay levels. This should all be set within a framework of robust governance while ensuring discretionary elements for variable pay are minimised to build and maintain employee confidence.

Our latest paper looks in detail at current variable pay design trends and explores the nine ways to enhance the variable pay design in more detail. Download the paper here.

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