Employee Empowerment – Good or Bad
What motivates people to work? Money may be the primary reason, but beyond a certain limit it fails to. Organizations have been trying out different things to increase the level of motivation of its employees. Employee empowerment is one of them. Employee empowerment means that an employee is given a chance to be enterprising, take […]
Some Points to Consider for Professionals on Work Life Balance
In these hypercompetitive times, stress and strain are common causes for concern for all professionals. Given the fact that most professionals work for twelve-hour workdays and more, it is natural that they begin to feel stressed out and tired because of overwork. This has the consequence of upsetting their physical and mental health as well […]
Role of Managers in Employee Development
Employee development activities refer to steps taken by an organization in order to encourage employees to constantly enhance their skills with time and upgrade their existing knowledge. Knowledge upgradation is essential to cope with the changing times and unforeseen circumstances. You just cannot apply the same skills everywhere. One needs to keep himself/herself abreast with […]
Absenteeism at Work and its Implications for Organizational Performance
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The Rise of the Knowledge Worker
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The practice of linking pay to performance has been around for a while. However, what’s new is that the percentage of pay that is linked to performance and the way in which the same is structured around different components of performance is new.
We all know about the system of increments and bonuses in the Government and Public Sector. These were designed in such a way that the employee’s performance is rewarded proportionally. However, the quantum of bonus and increments was so small that it hardly had an effect on the pure play linking pay to performance. The resulting inefficiencies in the government and public sector have been extensively reported.
In recent times, the concept of linking pay to performance has taken on an entirely new dimension with the introduction of variable pay. This article discusses some aspects of the variable pay and performance linked incentives in place in the contemporary organizations.
One of the key components of this variable pay plan is the strategy of linking pay to performance. This is a strategy that has been followed by many Multinational companies across the world and consists of the overall pay structure being broken down into components. These components would include the basic pay, benefits and the variable pay. The variable pay would be paid out as a percentage of the whole subject to the performance of the employee.
For instance, if the employee gets a grade of 2 on a scale of 1 to 4, the variable pay would be 70-80% of the eligible amount and if the employee gets a grade of 1, the variable pay would be 120-100% of the eligible amount.
Accordingly, the performance of the employee determines the variable component of the salary. The international practice is to increase the component of the variable pay higher according to the hierarchy. This would mean that at senior levels of the employee hierarchy, the variable component can be as high as 50-60% of the overall pay.
Further, there can be different categories of variable pay.
The idea behind variable pay is that it provides an incentive for employees to feel a sense of ownership and take responsibility for their jobs as well and relate to the overall division and company.
By introducing variable pay, the management would ensure that employees are motivated to contribute individually and as a unit and a division and finally as part of the whole company. As outlined in the section on retention strategy, the sense of alienation of the employees can be reduced by making them feel part of a whole and not treat them as individual “cogs in the machine”.
In conclusion, this article has discussed variable pay and performance linked incentives as a necessary evolution to a system where merit is recognized more than it is being done now. Given the fact that many organizations in India follow this approach, it is time for the employees and prospective employees to attune themselves to this concept and work accordingly.
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