Variable Compensation: An Overview Worth Noting

As part of a strategic compensation plan, variable compensation adds value and advantages to employer, employees, and the company as a whole. Here’s how and why.

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A company’s compensation plan may be the single most crucial element in attracting top talent and keeping high-performing current employees. In fact, a significant percentage of organizations have been reporting that pay is the reason they’ve been losing talent.

Most positions receive either a base pay or an hourly wage, for starters. From there, pay programs may differ. Depending on the role, there may be a variable compensation plan in place.

When used wisely, variable compensation can attract top talent, motivate employees, and help retain talent.

This article will define variable compensation, explain its benefits, and list several of the most common types.

What is variable compensation?

Variable compensation is pay that isn’t automatically set for the same amount every time. Variable pay may hinge on various factors and is usually based on reaching desired outcomes. An individual’s, team’s, or company’s performance is usually the basis for variable compensation. This structure is often used as part of a sales compensation plan.

Benefits of variable compensation

A well-designed compensation strategy offers many lucrative advantages to the employee and company. Note these 4 benefits that a variable pay plan provides.

Correlates with performance

An employee with a variable pay structure knows that hard work and focus can put more money in their pocket. If they slack off and become unmotivated, they probably won’t receive their variable compensation. This scenario differs from a fat salary directly deposited regardless of the employee’s performance.

Increases productivity and engagement

If you don’t cross the finish line, you don’t get paid. Variable compensation plans should increase employees’ drive to ensure they meet the strategic goals. Having “skin in the game,” they’ll be more likely to be engaged in collaboration, problem-solving, and execution of their work.

Helps employees increase their earning potential

A fixed salary or hourly wage is a stable, secure way to make money. However, being able to make more money through effort is an attractive prospect to many employees. Variable incentive plans can help team members control their total compensation and increase income by hundreds or thousands of dollars. Making more money can happen without a raise.

Risks less of the company’s payroll budget

Variable compensation benefits companies because it allows them to pay for the effort following positive results. For example, sales reps get commissions after they close a sale and the company has the money. A variable compensation strategy helps cash flow and keeps businesses from being too payroll heavy in comparison to their revenues.

Variable compensation examples

There are different types of variable compensation to increase employee engagement and earnings opportunities. Here are 6 examples of the most commonly used methods.


Individual performance of a sales representative or customer service team member directly impacts commissions. Companies use a commission structure to entice salespeople to close more sales. Success results in the employee being paid a percentage of the sale. Commissions work well because the company enjoys increased revenue from the sale, and the employee receives a fatter paycheck.

Team bonus

Sometimes earning incentive pay takes a group effort. Some companies set bonus thresholds for sales teams and other groups. Sales team goals might include reaching a certain number of new sales or bringing on a specific dollar amount in new business. Other teams may receive extra employee compensation by implementing a new software system or delivering a project within deadline.

Individual bonus

Individual bonuses differ from commissions because they’re typically a lump sum awarded for an attained goal. Commissions, on the other hand, are percentages tied to what sales representatives sold. Individual bonuses may be performance-based or driven by other factors. Employees may receive an individual bonus for reaching certain career milestones or goals. Some companies offer longevity bonuses on employee anniversaries, set up a bonus structure for meeting pre-set quarterly goals, or give an end-of-year bonus “just because.”

Company performance bonus

Another cash compensation opportunity above an employee’s base pay is a company performance bonus. This type of bonus is based on company-wide performance. For example: hitting a specific sales revenue, reaching an overall sales amount, or bringing on a certain number of new customers. Every employee benefits from a company performance bonus, which can aid employee retention efforts.

Profit sharing

The idea of profit sharing is if the company does well, the employees benefit, too. When a company has a good year and enjoys increasing revenue, it passes some of the profits to the employees. Profit sharing may be a cash bonus or a deposit into the employee’s retirement account. Companies using this method of variable compensation may write hefty checks some years and have little or nothing to share in others.

Stock options

Companies may offer employees the opportunity to buy company stock at a set price for a period. While this proposition requires employees to lay out cash upfront, they can realize dramatic returns on their investments if/as stock rises.

Using variable pay as part of your total compensation strategy

Variable compensation’s success can vary depending on the company and its teams. Adding variable pay elements to your compensation package can compel employees to maintain their focus, work more diligently, and perform better. People appreciate the opportunity to earn more money, and many will optimize that opportunity for mutual benefit.

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