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No More Fixed Salaries! How Variable Pay Programs Will Save Our Companies and Our Jobs

By Kevin on June 9, 2011 in employee engagement
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For most of human existence, pay has been tied directly to output. We consumed what we hunted, later we bartered our crops and livestock, and still later we would swap services we performed for lodging or meals. Even after the invention of money we received it for the goods we made or for specific services we performed (e.g., shoeing a horse).

“For most of human existence, we consumed what we hunted…until the industrial revolution.”

But the industrial revolution and the nature of basic task work inside factories quickly broadened the practice of paying for time. Unskilled factory workers were paid wages by the week or by the day, with many people working as many as 16 hours in a 24-hour period. In the 1800’s the English labor movement rallied around a pay-for-time slogan, “A Fair Day’s Wages for a Fair Day’s Work.” In the 1900’s a new army of “white collar” office workers began receiving salaries based on annual estimates of time worked.

This two century long experiment in fixed-pay-for-fixed-time peaked in the 1930’s. Then slowly but surely more and more corporations began to introduce “variable pay” programs for at least part of their workforce. Variable pay refers to compensation systems where a large part of total compensation is performance based, and must be re-earned each year. The most common type of variable pay today is sales commissions. Sales reps make a low base salary, but are primarily compensated for their results (not their time).

“…25% of all pay will be performance-based a decade from now.”

Variable pay programs have been dramatically increasing in recent years. Due to global competitiveness and the Great Recession we are slowly but surely returning to being a hunter-gatherer species. A company that is uneasy about offering a full-time job for a $100,000 a year, might be more willing to hire someone if the base pay was only $80,000 with an upside of $120,000 based on individual and company performance. Because of the state of the job market, I believe that 25% of all pay will be performance-based a decade from now.

For those used to a steady 40-hour week with a fixed paycheck, variable pay can seem unusual and even threatening. Your compensation is indeed at risk. But this dramatic shift to variable pay is an example of “We-principles” at work. Employers benefit from variable pay as it better enables them to manage base costs, reduce risks from unforeseen events, and reward employees whose efforts directly drive business outcomes. Talented workers benefit from variable pay programs because it can increase their compensation each year far beyond cost-of-living increases and better rewards their individual efforts. Variable pay balances the goals of the organization with the goals of the individual.

“Variable pay aligns the goals of the individual with the goals of the organization.”

If you are a company leader or manager who controls your team’s compensations, think about shifting pay-for-time to mix of base salary and pay-for-performance. Make the variable based on not just individual results (which would encourage selfish behaviors), but also on team and company results.

Are you an individual contributor who is tired of annual 2% cost of living increases? Think about how what you do can be measured. How might you approach your current boss, or your next job interview, and propose a win-win variable pay format? To get started think about the 2-to-1 rule of thumb for variable pay. You should be willing to give up $1 of fixed pay in return for at least $2 of additional at-risk pay.

So what do you think? Would you be willing to give up some base pay in return for a far greater bonus? Why or why not?

Note: This blog was adapted from the NY Times bestseller, We: How to Increase Performance and Profits Through Full Engagement.

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Kevin Kruse is a NY Times bestselling author and keynote speaker. Get more success and tips from his newsletter at kevinkruse.com and check out keynote video clips. His new book, Employee Engagement 2.0, teaches managers how to turn apathetic groups into emotionally committed teams.

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