Variable Pay the New Merit?

In light of the current economic conditions along with the recent regulatory changes, compensation and human resources professionals may ask “what does this mean for variable compensation”? We recently developed and presented on this topic at the Atlanta Area Compensation Association’s Annual Forum and found that we were not the only ones pondering this question.

Clearly the economic downturn has taken a toll on the ability for businesses to payout bonuses and incentives. Not surprisingly, recent surveys have shown that both incentive targets and actual payouts are down for both 2008 and 2009. With this being the reality, it is more important than ever to communicate with employees to ensure they understand the business reasons for not being able to payout bonuses and incentives. In addition, just because an organization can’t reward performance monetarily, it does not mean that management can’t recognize employee achievements. Another point of discussion is whether or not variable pay in partnership with strategic goal setting can be used as a tool to pull organizations out of the recession. Maybe now is not the time to abandon these plans but to use them to our advantage to see just how far our employee will and can go to help organizations succeed.

Looking at recent legislation that has been passed, the Lilly Ledbetter Fair Pay Act may also provide some interesting opportunities for variable compensation. Under this Act, employees have 180 days after each “discriminatory pay setting decision” to file suit which means that if the discriminatory pay setting decision is reflected in base pay, every paycheck restarts the 180 day clock. That is a big window of time for an employee to bring a lawsuit against an employer! Some organizations may choose to differentiate compensation for top performers in the form of variable compensation payouts as apposed to merit increases applied to base salaries. The reason for this is that short term incentive payouts are a “one time” pay setting decision while base pay increases are reflected in every paycheck, thus restarting the 180 day clock. It is important to note that if employers do choose to use variable compensation as a means of differentiating pay, they still need to ensure that these decisions are documented and based on business-related factors that will not be considered discriminatory. This could be a difficult adjustment for employees, especially top performers, who have become accustomed to receiving merit increases. So the question remains, is variable pay going to become the new merit?