The definitive guide to creating a variable compensation process

In the past, fixed wages were what attracted the attention of workers. Nowadays, it is no longer enough. The variable remuneration process has become increasingly important and has become part of a strategy that has consolidated itself as an important management tool .

Through this resource, it is possible to invest in employee motivation, which directly and positively impacts productivity. As a result, the company ensures results better and more effective in the long run.

This post will help you better understand variable remuneration and show how you can apply it in your company. For this, let’s go through the following points:

  • what is this process;
  • how does it work;
  • how to build it.

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So, how about understanding this subject better? Just keep following:

 

Understand what the variable remuneration process is

This is the type of remuneration that varies according to the employee’s performance. That is, the more he produces, the more he receives at the end of the month. For this reason, variable remuneration is seen as a reward.

This type of income can be paid in any company that relies on the analysis of performance indicators. The most common is to be applied to salespeople and workers in the production sector, but it can also be adopted for executives.

For this, it is necessary to use notes that vary according to pre-established rules. These standards must not be changed in order to maintain the reliability of the program.

Variable remuneration can also be called a bonus. It consists of indirect gains, which motivate employees to be more productive and efficient. Other benefits achieved are:

  • the increase in the company’s strength;
  • encouraging the professional’s feeling of appreciation;
  • encouraging co-responsibility;
  • the search for competence;
  • the strengthening of the professional’s bonds with the company;
  • employee engagement with organizational objectives;
  • the enhancement of the individual’s contribution to the achievement of defined objectives and goals .

It is important to highlight that the implementation of this process requires that the entire company (management and employees ) adopt a different attitude. Employees have the understanding that the salary adjustment will no longer be annual. They should start to have a negotiating and entrepreneurial stance to improve their income.

In this case, professional motivation begins to come through alternative forms of remuneration, such as profit sharing, indirect wages and profit sharing.

It is up to employers to take care of this mechanism properly. They must understand that it is a management tool, not just a way to compensate for low wages paid to employees.

 

Understand how to reward people

The need to use reward programs to value and motivate employees requires an understanding of how this process can be implemented.

First, we must remember that rewarding people is one of the basic processes of managing people. It can be composed of 3 actions:

  • remuneration;
  • incentive program ;
  • benefits and services.

 

The traditional approach

The traditional approach defines that people are motivated exclusively by salary, material and financial issues. In this scenario, compensation follows immutable and rigid standards that meet standardized job evaluation processes.

This means that all employees are evaluated in the same way and their individual performance and differences are ignored. Compensation, according to this approach, is based on time and emphasizes the employee’s history and fixed values.

 

The modern approach

In the modern approach, this context is different. It is understood that people are motivated by different types of incentives, which can be salary, job and company satisfaction, goals to achieve, need for self-realization, etc.

That is why the remuneration follows a flexible strategy and is in accordance with personalized processes, since the policy adopted by the organization considers individual and performance differences.

It is in this approach that variable remuneration fits, because it is based on the results and goals achieved by employees. Its focus is on future performance and flexible and variable values.

In this situation, the employee’s total compensation consists of:

  • monthly salary or hourly wage, which is the basic remuneration;
  • salary incentives, such as profit sharing, bonuses, etc .;
  • benefits, for example: health insurance, life insurance , subsidized meals, among others.

 

Understand why variable compensation attracts talent

In this modern approach, variable compensation is a way of attracting talent. There are several ways to do this, as each individual has specific needs and has a different assessment.

The great advantage of this process is to retain talents while motivating employees. A transparent and structured remuneration program becomes an important tool for aligning individual efforts with strategic business objectives.

To achieve this result, there is no magic formula. Each enterprise needs to analyze and define which model is most suitable considering its profile, the characteristics of employees and the objectives it is intended to achieve.

That is why some characteristics must be well defined. The variable remuneration must be:

  • realistic, be in accordance with the limits of the organization and aligned with the market;
  • equitable and be in accordance with the principles of social responsibility in order to contribute to a more just society being built;
  • objective and based on parameters that are influenced by employees;
  • transparent and with well-defined criteria, which must be known and understood by all employees, in addition to being subject to negotiation;
  • used by management and all managers, but offers space for negotiation;
  • updated permanently and systematically to correct necessary details.

These points help to implement the variable compensation program and make it possible to increase the talent retention for the organization.

 

Find out how the variable remuneration process works

The main objective of this process is to transform fixed costs into variables. Therefore, its application can be made through shareholdings, awards and incentives or profit sharing.

It is important to note that variable remuneration must follow a legal basis. It is governed by the Consolidation of Labor Laws (CLT). The periodicity of payments is unrestricted and the calculation basis are individual and sector goals.

The law also determines that this remuneration must complement the fixed one and that the labor charges are incurred in full. It is important to highlight that there is a specific contract and that the affected workers are selective, that is, the company does not need to include everyone in its strategy.

This process is foreseen by the Federal Constitution and helps to create a greater link between the worker’s performance and the reward. The most well-known and applied models in Brazil are:

  • bonus;
  • commissions;
  • Participation in profits and results;
  • incentive campaigns;
  • and competency-based, strategic or skill-based compensation.

 

Take care when implementing this process

The adoption of variable remuneration brings several benefits to companies. Among them can be mentioned the incentive to search for total quality, the improvement of productivity, the reduction of costs and expenses, the reinforcement of the company’s cultural values ​​and the incentive to collective and individual participation in the PDCA cycles .

Tip: the PDCA cycle is a methodology used to implement strategic planning on an ongoing basis. It consists of the following steps: planning, executing, analyzing and acting to correct errors or flaws.

The entrepreneur and managers, however, must be careful with the implementation of variable remuneration. This is because a poorly structured strategy can have little effect or even harm the organization.

This process must be aligned with the company’s interests. Otherwise, the team’s behavior will be unwanted. To better understand, look at this example: you have set a goal to increase team output. The reward is a bonus at the end of the month. This can cause a drop in production quality because the focus will be on achieving the objective.

Therefore, it is necessary to take some main care when stipulating variable remuneration. Are they:

  • have a clear definition of the goals you intend to achieve so that this does not impact the evaluation of results. These objectives must be measurable, realistic and specific to each professional. In addition, it is necessary to detect the goals for each sector of the company;
  • consider the importance of each action in relation to the area objectives, individual and global;
  • identify the limits for granting participation in profits and results to ensure the sustainability of the organization;
  • inform all employees that the process will be implemented and indicate how the determination of the objectives will be carried out, as well as the way in which the results will be analyzed;
  • ensure that all professionals are involved in the implementation of variable remuneration, from management to employees in the productive sector;
  • identify and value the company’s goals according to global performance indicators ;
  • do not replace quality with quantity. That is, whenever you use a goal aimed at reaching a number, remember to align it with a good execution indicator. For example: produce a thousand pieces per month that do not contain deviations and failures;
  • use indicators that are easy and simple to measure. If they are too complex, employees will have a hard time understanding what they should do. If the measurement is laborious, they will also entail higher costs and will not be entirely accurate, which offers scope for noise and distrust in the relationship with employees.

There are also some criteria that must be adopted before building the variable compensation plan. Check out what they are:

 

Internal × external balance

Employees must feel that they receive equitably compared to other employees who have a similar job. To achieve this, it is necessary to analyze the salary paid in the labor market and set the values ​​according to similar occupations of other companies. This balance aligns the remuneration to that of other companies and ensures more satisfaction among workers.

 

Performance or time at home

The remuneration can be focused on the performance of the employee and be based on group or individual contributions. For example: earned for units produced, premiums for cost reduction , sales commissions, bonuses for excellent service, etc.

On the other hand, remuneration for length of service allows the payment of a salary according to the position, but with an additional for years worked in the company.

 

Remuneration of position or person

Variable compensation can focus on how the job contributes to organizational values ​​or how the person’s skills and knowledge collaborate for the organization or work.

The first case is the traditional approach, while the second shows the talents that people have. This means that the remuneration increases as the employee is more able to carry out his activities successfully.

This format is especially suitable for the following cases:

  • the workforce is educated and willing and able to learn new tasks;
  • the organizational structure and technology change constantly;
  • the opportunity to change vertical positions is limited;
  • team spirit and participation are encouraged;
  • absenteeism and turnover costs are high and cause many production losses.

 

Equalitarianism or elitism

Equalitarianism is when the largest possible number of employees is governed by the same compensation plan. Elitism, on the other hand, defines different rules according to groups of employees or hierarchical levels.

The most current model is the egalitarian one, because it allows greater flexibility and encourages a closer relationship between managers and employees. It also drives collaboration.

Thus, it is evident that variable remuneration works as an instrument that helps achieve organizational goals and proposes changes in the company’s culture. It favors several issues, such as teamwork, the improvement of internal processes and the strengthening of quality concepts.

 

Learn how to build a variable compensation process

Variable compensation is a process that involves human resource management, finance and planning. Its construction goes through 6 main stages.

Next, we will detail each one and indicate what you must do to implement this process in your company. Check out:

 

Definition of indicators

This is the first step as it is the basis of the variable remuneration program. Indicates what and how it will be evaluated.

There are several indicators and assessment methods that can be used. The former are generally linked to the goals and indicate the alignment made in relation to the strategic objectives, whether of an employee, or of the entire company.

An example of an indicator is Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA or, in Portuguese, earnings before interest, taxes, depreciation and amortization).

EBITDA is calculated as follows: gross profit – operating expenses (except interest, depreciation and amortization for the period).

The objective is to specifically calculate the profit related to the business, discounting any possibility of financial gain, for example, rents, derivatives and other income that the company generated in the period.

Another element taken from the EBITDA calculation is interest on loans. This alerts entrepreneurs to the need to care with a false perspective regarding the organization’s liquidity.

Another widely used indicator is Economic Value Added (EVA or, in Portuguese, added economic value). It indicates the profit obtained by the company in the year determined after Income Tax less the cost of capital employed in the operation (which is composed of the company and third parties).

Its formula is: return on net operating assets – weighted average cost of capital × net operating assets.

In other words, we can understand the EVA calculation as: operating revenue – costs ÷ expenses – depreciation = operating profit – financial expenses = profit before Income Tax – Income Tax = net profit – cost of equity.

It is worth noting that the EVA to be achieved must include provisioning for investments, in addition to the amount that will be distributed to owners and shareholders.

 

Definition of area indicators

Those responsible for the area must define an indicator that will evaluate the performance of that sector throughout the year. These objectives must be related to the organizational strategy and contribute to achieving the defined global objectives.

This indicator must also be balanced to focus on reducing the risks of unwanted results and considering the team’s aggregate performance.

 

Definition of individual indicators

Area managers must define and negotiate indicators and goals with each employee . They must consider the characteristics of the employee and be in accordance with the needs of the position.

This attitude should be seen as a way for the employee to commit to the adoption of variable remuneration and be part of the success of the objectives of the area and the global ones.

It is important to emphasize that these indicators must be capable of being measured and delimit deadlines, quantities, quality, project stages, values, indices, etc. They must motivate professionals with concrete chances of overcoming and reaching, according to the conditions and the resources necessary for that.

 

Weighting of objectives

Setting goals takes the next step, which is weighting. It is necessary to balance the weights of importance of each of them, that is, the global, the area and the individual. The purpose is to ensure greater equity and fairness among the results found.

This step can also be seen as a definition of rules. You must create the payment groups and, in each of them, comparisons are made between areas and organizational levels. In other words, the idea is to create a mathematical formula and a reward curve to which employees are submitted.

This is also the time to define eligibility criteria, since not all employees will participate in this action.

 

Remuneration parameters

This is the stage that allows determining and predicting the validity of the variable compensation plan. This means delimiting with what percentage of the goal achievement by indicator the program will be valid. For example: 80%, 100% or 120%.

The company must define this percentage. If the result is lower than that, there is no distribution of results or payment of any type of variable remuneration. An alternative is to make a proportional return.

The calculation must be valid for the individual, area and global results of each employee.

 

Criteria for plan eligibility

The variable remuneration program will only be eligible according to the establishment of certain criteria. It can be extended to all employees, but it is important to follow some rules in accordance with Law No. 10,101 / 2000.

These criteria indicate that, in the year in which the global, departmental and individual indicators are calculated, the employee must:

  • having been admitted within a maximum period of 1 month before the final calculation date;
  • being active as a company employee on the final calculation date;
  • not be away from your activities due to  leave or illness for more than 180 days.

 

Monitoring of objectives

The objectives and indicators must be followed up every month. It is necessary to show on TV, panel or intranet how the goals are being achieved so that everyone feels responsible for this process.

In relation to the individual objectives that were negotiated and defined, they must be analyzed periodically in order to verify the performance based on the projection made and identify the need to make corrections according to the national or international scenario and even changes that occurred in the market and that impact the business.

This systematic management of results is essential for the variable remuneration program to be successful. This process must also solve the deviations, monitor the results and motivate employees throughout the year. This is mainly ensured if communication is agile, transparent and effective.

 

Payment criteria

The last step in implementing this process is the payment criteria. They can determine what the values ​​will be:

  • proportional to the time worked;
  • based on the arithmetic mean of the fixed salary;
  • based on nominal salary plus the arithmetic average of commissions on sales made (in this case, from the commercial area).

One way to guarantee employee satisfaction with payment criteria is to analyze which are the most beneficial in their view. This can be done through an internal search.

 

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