ABSTRACT

This chapter addresses the design, implementation and administration of variable pay plans. The oldest type of individual incentive plan is the output-based plan that rewards productivity. Another type of output plan is the sales commission, which ties pay to the volume of sales produced by an individual. Basing variable pay on the attainment of specific objectives is a widely used approach. The use of recognition at the individual level can also provide employees with valued rewards, even though they are not financial. Individual plans work best in contexts where individuals work relatively independently of each other and have large amounts of discretion about how they do their work. Productivity- or cost-based plans are often called gainsharing plans. When performance at the organization-wide level is the focus of variable compensation there are two major types of plans— one that provides rewards in cash and a second that uses stock or other forms of equity or ownership.