Variable pay can be defined as any compensation plan that emphasizes a shared focus on organizational success, broadens opportunities for incentives to nontraditional groups (such as nonexecutives or nonmanagers), and operates outside the base pay increase system.
an incentive program that is tied to the company's performance therefore helps the company manage its labor costs. The variable pay structure allows the firm more flexibility in its payroll costs by reducing the amount of bonuses or incentives that has to be paid out when the company is not performing well. For example, as a result of the Asian financial crisis, Hong Kong Telecommunications Limited reduced its employees' salaries in exchange for a performance-linked bonus system! This helps the company manage its cash flow better than the fixed salary system. However, financial insecurity is built into the system for employees. Economic downturn, new competition, or some other force beyond the employee's control may lead to lower profits and hence, lead to lower or even nonexistent bonuses. Due to the Asian financial crisis, most companies cut the bonuses as the first step to stem their cash flow problems. Hence, employee productivity - may actually decline. Exhibit 11-2 outlines questions that can be used .to evaluate the success of variable pay systems. The following sections discuss different types of variable pay.