What is a variable compensation plan?

A variable compensation plan is an approach by which firms compensate an employee based on performance, the performance of their team or the performance of the organization as a whole. In contrast to fixed salary, which does not fluctuate with performance, these types of plans may have some components that compensate them based on certain metrics or goals.

There are many forms these plans take: bonuses, profit sharing, commissions, stock options, performance incentives. There is a characteristic, though; the amount an employee is paid can vary based on set criteria. The criteria are usually laid down beforehand.

Variable compensation plans are used to incentivize employees to achieve the goals of the organization, to encourage them to strive harder, and reward them upon achieving the goals of the organization. Variable compensation plans are not limited to sales roles, where commissions are often dependent on sales targets, but they are used in almost every department and industry. The structure and the specific criteria of a variable compensation plan vary from one firm to another depending on organizational goals, industry norms, and individual job profiles.  Read on to see our variable compensation plan examples.

 

Variable Compensation Plan Examples

Variable compensation plans can vary widely depending on the industry, company size, and specific job roles. Here are some common examples across different sectors:

1. Sales Commission:

Sales representatives often receive a commission based on the value of the sales they generate. This can be a percentage of the sale amount, a flat fee per sale, or a tiered structure where the commission rate increases as the sales targets are exceeded.

 

Sales Commission Example  for a Software Sales Representative:

In this scenario, a software company employs sales representatives to sell its software products to businesses. The company implements a commission-based compensation plan to incentivize the sales team to achieve sales targets and drive revenue growth.

Structure:

  • Base Salary: Sales representatives receive a fixed base salary, providing a stable income regardless of sales performance. For example, a sales representative might have a base salary of $50,000 per year.
  • Commission Rate: In addition to the base salary, sales representatives earn commissions based on the value of the sales they generate. The company sets a commission rate, typically a percentage of the total sales revenue generated by the representative.

Example Commission Rate Structure:

  • Sales up to $50,000: 5% commission rate
  • Sales between $50,001 and $100,000: 7% commission rate
  • Sales above $100,000: 10% commission rate

Example: Let’s say a sales representative closes a deal worth $80,000 in software sales.

  • The first $50,000 of the sale is subject to a 5% commission rate.
    • Commission on the first $50,000 = $50,000 * 5% = $2,500
  • The remaining $30,000 of the sale falls into the second tier with a 7% commission rate.
    • Commission on the remaining $30,000 = $30,000 * 7% = $2,100

Total Commission: $2,500 (from the first tier) + $2,100 (from the second tier) = $4,600

Total Earnings: Base Salary ($50,000) + Commission ($4,600) = $54,600

Performance Targets:

  • The company may set performance targets for the sales team, such as monthly or quarterly sales quotas, to qualify for additional incentives or bonuses.
  • Sales representatives who consistently exceed their targets may be eligible for higher commission rates or additional rewards.

Benefits:

  • This commission plan incentivizes sales representatives to pursue larger deals, as higher sales volumes result in higher commission earnings.
  • It aligns the interests of the sales team with the company’s goals of increasing revenue and market share.
  • The base salary provides financial stability, while the commission structure rewards performance and incentivizes sales representatives to maximize their sales efforts.

Overall, this sales commission plan provides a balanced approach to compensation, offering a combination of base salary and performance-based incentives to motivate the sales team and drive business growth.

2. Bonuses:

Companies may offer performance bonuses tied to individual, team, or company-wide goals. These goals could include achieving sales targets, meeting project deadlines, or reaching specific financial metrics. Bonuses can be awarded on a one-time basis or on a recurring schedule, such as quarterly or annually.

 

Performance-Based Bonus Plan Example for Customer Service Representatives:

In this example, a company that provides customer support services implements a performance-based bonus plan to motivate and reward its customer service representatives (CSRs) for delivering exceptional service.

Structure:

  • Base Salary: CSRs receive a fixed base salary for their regular duties, providing financial stability regardless of performance. For instance, a CSR might have a base salary of $40,000 per year.
  • Performance Metrics: The company establishes key performance indicators (KPIs) to measure the quality and effectiveness of customer service. These metrics may include:
    • Average customer satisfaction rating
    • Number of resolved customer inquiries or issues
    • First-call resolution rate
    • Average handling time
  • Bonus Criteria: CSRs become eligible for bonuses based on their performance against these metrics. The company sets specific targets or benchmarks for each metric, and bonuses are awarded based on individual performance relative to these targets.

Example Bonus Structure:

  • Customer Satisfaction Rating: CSRs receive a bonus based on their average customer satisfaction rating over a specified period (e.g., quarterly or annually).
    • Average rating of 4.5 or higher: $500 bonus
    • Average rating of 4.0 to 4.49: $250 bonus
    • Average rating below 4.0: No bonus
  • Resolved Inquiries: CSRs earn bonuses based on the number of customer inquiries or issues they successfully resolve within a given timeframe.
    • Resolve 90% or more of inquiries: $300 bonus
    • Resolve 80% to 89% of inquiries: $200 bonus
    • Resolve less than 80% of inquiries: No bonus

Example: Let’s say a CSR achieves the following performance metrics over a quarter:

  • Average customer satisfaction rating: 4.6
  • Percentage of resolved inquiries: 92%

Bonus Calculation:

  • Customer Satisfaction Rating Bonus: Since the average rating is 4.6, exceeding the threshold for the highest bonus tier, the CSR receives a $500 bonus.
  • Resolved Inquiries Bonus: With a 92% resolution rate, exceeding the target of 90%, the CSR earns a $300 bonus.

Total Bonus: $500 (Customer Satisfaction Rating Bonus) + $300 (Resolved Inquiries Bonus) = $800

Total Earnings: Base Salary ($40,000) + Bonus ($800) = $40,800

Benefits:

  • This bonus plan incentivizes CSRs to provide excellent customer service and achieve specific performance targets.
  • It rewards individual performance and encourages CSRs to focus on metrics that contribute to overall customer satisfaction and operational efficiency.
  • By linking bonuses to performance, the company reinforces a culture of accountability and continuous improvement among its customer service team.

Overall, this performance-based bonus plan serves as a powerful tool for motivating CSRs, driving exceptional service delivery, and ultimately enhancing the company’s reputation and customer loyalty.

3. Other Examples of Variable Compensation Plans:

Variable compensation plans are being used by companies in all industries and include the following examples:

  1. Profit Sharing Plan: In a profit-sharing plan, employees are given a share of the company’s profits based on certain predetermined criteria. This could include distributing part of the company’s annual profits to employees, with the proportion allocated based on salary, job level, or years of service. Make sure to create a profit sharing agreement to avoid uncertainty.
  2. Team-Based Incentive Plans: There are companies which implement team-based incentive plans where company rewards collective performance rather than individual achievement. These plans would give bonuses or incentives to the entire team, department, or business unit that performs based on certain team-building objectives.
  3. Performance Shares: Performance shares are a type of equity compensation where the employees are given company shares based on predefined performance goals or benchmarks. The amount of shares awarded depends on the achievement of predetermined performance objectives, such as revenuetracking, profitability, or appreciation in stock price.
  4. Retention Bonuses: To encourage employees to stay with the company, companies offer retention bonuses to the employee after the employee has served a certain period. These bonuses are usually awarded after the employee has completed a predetermined period of service and are used to encourage the employee to stay with the company for a longer period.
  5. Recognition Programs: Recognition programs are a way of rewarding or acknowledging employees for outstanding performance, contributions, or accomplishments. These programs can take on different types, such as employee of the month awards, peer recognition programs, or spot bonuses due to outstanding accomplishments.
  6. Profit-Linked Bonuses: Profit-linked bonus plans offer bonuses based on the performance of a company in its financial position. These plans allow employees to have a share in the profitability of the company.
  7. Customer Satisfaction Incentives: Businesses incentivize employees based on the metrics concerning the customers’ satisfaction; for example, Net Promoter Score (NPS), or customer feedback ratings. Employees who get good ratings or positive feedback from customers get to have bonuses or rewards.
  8. Project-Based Incentives: A company may use project-based incentives in a situation where employees are working on a specific project or initiative. In this case, an employee gets an incentive based on reaching specific project milestones, keeping a deadline, or meeting project goals on budget.
  9. Safety Incentive Programs: In some industries, where there are safety concerns, businesses invest in a safety incentive program aimed at getting employees to perform their duties in the workplace. These programs incentivize employees to maintain a safe environment, stay within the company’s safety standards, or to reduce incidents and injuries at work.

The above are but a few examples of variable compensation plans used by businesses to motivate and reward employees on the basis of performance, achievements, and other factors. Each plan has a specific structure and criteria based on the objectives of the company, the industry, and the culture of the company.

5 Reasons to adopt a variable compensation plan:

  • Motivate Employees: Encourage performance
  • Drive Business Results: Strategic objectives and goals
  • Attract and retain the best: Stay competitive and access the best
  • Flexibility: A plan tailored to your organization
  • Cost-effective: Performance-linked compensation, not salary raise only

 

A variable compensation plan is a powerful tool for organizations seeking to drive performance, motivate employees, and achieve business goals.

Build your bonus plan

Speak with an expert to create your bonus plan