Straight Pay and Variable Pay

Bonuses and their Evolution over Time

In the initial decades of the 20th century when the modern corporation began to take shape, employees were paid the salaries in the form of wages, overtime, and festival bonuses. The pioneering companies such as General Motors under its iconic leader, Henry Ford, were of the view that employees had to be paid salaries that would ensure that they had the money to spend on consumer goods.

With the gradual evolution of the corporation, owners and capitalists decided that in addition to the basic salaries, employees would have to be paid bonuses depending on their performance. Whereas the initial emphasis was on bonuses during Christmas and which were the same for all employees, the later decades witnessed the first and the early forms of linking bonuses to performance and thus, the advent of the concept of variable pay.

The difference between variable pay and straight pay is that the latter is paid according to the rank and the designation of the employee whereas the former is paid according to his or her performance over the period for which it is being paid.

The Rise of the Services Sector and Variable Pay

Before proceeding further into the discussion, it would be worthwhile to note as long as the manufacturing sector was the predominant part of the economy, wages were more or less uniform for each designation and only the bonus was different and that too by not much. This was because the work was manual and mechanical in nature which meant that even the best performing employees could manage marginal increase in productivity compared to those on the lower end of the performance scale.

However, once the service sector arose in prominence and the knowledge worker gained traction with the advent of the IT (Information Technology), Financial Services, Call Centers, and other service based industries, employees began to innovate along with the organizations and hence, some employees mastered their jobs better than the others as well as were more inventive.

Further, with marketing becoming prominent, it was felt necessary that a percentage of the sales generated ought to be given to them as incentives. Thus began the concept of variable pay in addition to the basic pay and other benefits.

What is Variable Pay and what are the Components of Variable Pay?

Variable pay as it is practiced now has several components and they include pay linked to individual performance, pay linked to team performance, pay linked to group performance, and pay linked to organizational performance. In addition, some investment banks also link variable pay to the volume and the amount of money generated in trades and deals.

Turning to how variable pay works in practice, organizations such as Infosys have variable pay structures that are dependent on the individual performance of the employee which is similar to the traditional definition of bonuses. However, another component of variable pay is dependent on team and group performance which means that there are more incentives for collaboration and contributions to the team and group as a whole.

Further, variable pay is also linked to organizational performance which means that if the organization performs well and is in a position to make profits and pay dividends, some of the benefits are passed on to the employees as well.

Employee Stock Options

Turning to the concept of ESOPs or Employee Stock Options that are included in variable pay, some organizations across verticals and industries provide stock in the companies to their better performers.

In addition to being an incentive to work well as well as contribute to the organizational progress, these stock options also make employees stick to the companies in a symbiotic manner wherein as the individual employee and the organization together perform well, the former gets more ESOPs and the latter is assured of loyalty from the better performing employees.

Indeed, the attraction of ESOPs is so alluring that many employees often pick the companies in which they want to work depending on whether the particular company has provisions for stock options.

Conclusion: The HR Rationale for Variable Pay

Finally, the human resource managerial rationale for variable pay is that it acts as a motivator and an enabler of stellar performance by the employees.

In addition, the incentive to be a team player, to put the interests of the organization before that of the self, and the fact that competitive grading would ensure that the better performers are rewarded and the poor performers punished in terms of grading as well as pay are all cited by HR experts as being the underlying factors for variable pay.