Variable Pay for Employees

Variable pay is a way to allow employees to share in your organisation’s success, and it’s one of the most common questions we are asked about. It’s sometimes referred to as incentive pay, performance pay, or simply bonuses.

Employers are looking for ways to build employee engagement and wonder if variable pay should be part of that mix. We think it should be.

Why offer Variable Pay?

There is little doubt that most directors and managers are constantly searching for a competitive edge.

Employee engagement is an essential area for any one who employs staff. We are all seeking employees who seek a greater purpose in their work, are committed to our organisations and want to go the extra mile for our clients or customers.

We believe that variable pay is part of the employee engagement mix.

Variable pay is by definition income paid to an employee over and above their normal salary. It is not a guaranteed payment but rather dependent on certain metrics being achieved in the business.

So how does it work?

For years, senior executives have been remunerated on a mix of a base salary and variable commission.

These schemes are designed to ensure that executive faithfully executes the company’s business plan and builds sustainable growth.

A number of variables are commonly included in these schemes including metrics that measure profitability, revenue and cost. In recent years, non-financial metrics have become common, including measures of employee and customer satisfaction.

These non-financial metrics are often just as important and arguably more so. The are often measured using a Net Promoter Score (NPS). You can read more about by clicking on a previous blog article here.

Typically a variable pay plan will be based on a percentage of the employee’s annual remuneration. It is paid out once the goals set in the plan are achieved.

Will it make the boat go faster?

Sir Peter Blake famously challenged his America’s Cup team with the question, “will it make the boat go faster?”

Good variable pay plans do just that.

There are some vitally important things to consider when implementing a variable pay plan.

  1. Does it fit with your culture? If your team are not used to focusing on results, you may find that any variable pay plan may be met with indifference, or worse, hostility. Certain roles simply don’t mesh with the concept of variable pay. Administrative roles are notorious difficult. In order for any variable pay plan to succeed, you need to invest in a cultural change in the organisation.
  2. Don’t reward BAU – Business as Usual (BAU) is not something you should reward. There’s little point in writing a plan that is going to trigger variable pay when the company meets its annual budget. That’s just BAU. Variable pay plans should reward achievement that exceeds the bare minimum.
  3. Metrics must be objective – In order for a plan to be accepted by your team, the metrics must be objective and measurable. Subjectivity will destroy employee engagement faster than anything we know. Any behavioural goals should be the domain of the performance appraisal. They don’t belong in a variable pay plan.
  4. Set pragamatic metrics – Include non-financial metrics along with financial ones but keep things simple.
  5. Report on progress regularly – if your variable pay is only going to be paid annually, make sure that you keep the team updated at least monthly. That doesn’t mean sharing every detail of your P&L and Balance Sheet, but high level figures are important. It also builds trust.
  6. Set Metrics on what they can control – nothing puts people off more than being measured by metrics they can’t directly control.

Variable pay rewards employees financially for good outcomes.It is not in itself a motivator.

It won’t miraculously transform a company’s culture.

It doesn’t replace the need to mentor and coach team members and you will still need to monitor individual performance.

How is the Variable Pay taxed?

Variable pay is taxed using PAYE, just like an employee’s salary. It is income in the hands of the employee.

There are specific rules on taxing lump sums. There is an excellent summary on the Ministry of Business, Innovation and Employment’s website, which you can read here.


Generate Accounting specialise in variable pay plans. We’d love to catch up and talk about your ideas for building employee engagement and overachieving your goals.