Why Variable Pay is a Part of Competitive Compensation Programs

Despite the economic uncertainty in the U.S. right now, organizations are still pushing forward with including variable pay as part of their overall compensation strategy and compensation programs to retain top talent. Variable pay is compensation awarded to employees, in addition to their base pay. Generally, variable pay plans (bonuses) are based on performance measures.

Bonus plans at all levels are still in place. They seek to provide extra pay for meeting specific outcomes on top of the employee’s agreed-upon base salary.

Bonus Types

An organization may utilize several types of bonuses, such as:

• Spot bonus: Used to recognize a successful project and/or moment of exceptional performance.
• Retention bonus/longevity bonus: Rewards increasing tenure at the same organization.
• Sign-on bonus: Offered to new hires to encourage joining the organization/accepting a job offer.
• Referral bonus: Rewards current employees who recommend a candidate who is successfully hired by the employer. Referral bonuses can be provided at the time of hire, after 90 days of employment, or the plan may allow for a partial payment on the hire date, with the remaining amount of the bonus being paid out after 90 days.
• Performance bonus: Used to provide additional incentive to meet business-specified metrics tied to organizational goals.

Some organizations may use multiple bonus types as part of their variable pay strategy to reward for different reasons. For example, an organization currently short-staffed may temporarily decide to offer a referral bonus to employees who bring in new applicants for hire.

Performance bonus programs should include specific metrics before payouts occur.  Bonus targets can be set by job level, type of role, specific positions, or something entirely different. Regardless of your plan, it’s best practice to have consistent bonus targets for roles of comparable character to ensure individuals performing similar work are eligible for similar pay.

A pay-for-performance strategy should be based on the performance factors outlined as part of the overall performance management program. Eligibility for the same level of bonus payout does not necessarily guarantee that each employee will receive a bonus, but the opportunity to earn it is equal.

Designing Your Bonus Plan

When designing a bonus plan, explicitly state who is eligible and under what circumstances an employee has the opportunity to achieve a specific bonus. Other information, such as the expected timing of a payout, can be valuable to have in your employee handbook or policies manual. Including eligibility guidelines, such as "must be employed for a minimum of 6 months to be eligible for a spot bonus", provides necessary clarity to employees and managers.

Note for California Employers: When paying out a bonus or designing a bonus plan, it’s critical to clarify whether the bonus being given is discretionary or non-discretionary.

The Difference Between Discretionary and Non-Discretionary Bonuses

While a discretionary bonus is paid at an employer's discretion, a non-discretionary bonus is paid based on predetermined criteria. In other words, an employer can decide to give an employee a discretionary bonus without any criteria or strings attached. Think end-of-year holiday bonus or a spot bonus for a job well done. A non-discretionary bonus is based on previously agreed upon criteria (think of a production goal that is tied to a number or percentage).

Have More Questions? 

CEA partners with our sister association, Cascade Employers Association, to provide you with a team of Compensation Experts. They can handle everything from designing a bonus plan to reviewing your current compensation plan to help you create a compensation plan from scratch! Reach out to their compensation team for custom support!