Variable Pay Options: Why, When, How

Adding a variable pay system, or pay based on performance, is a supplemental way to boost employee performance and achieve company goals.



Getting the right candidates to apply for and accept job offers is a great indicator that your base pay for a position may be right on target. Adding a variable pay system, or pay based on performance, is a supplemental way to boost employee performance and achieve company goals without adding a fixed cost to the company’s bottom line.

However, without these five elements being in effect, you may actually demotivate employee performance.

There are several advantages to implementing variable pay options rather than giving a flat base pay increase to employees, even though variable pay methods are certainly more involved to implement and reward. Advantages include increased employee motivation, the ability for employees to get direct feedback in regards to their efforts, and the empowerment employees have to influence their income. Some of the most commonly-used variable pay ideas include:

  • Annual/quarterly bonuses
  • Profit sharing
  • Holiday bonuses
  • Company-paid trip
  • Lump-sum bonus for achieving a company goal
  • Team performance bonus
  • Individual performance bonus
  • Spot bonus (given at the time of accomplishment)
  • Newly acquired skill bonus

According to, there are five conditions that must be met in order to have a successful variable pay program:

  1. Employees must have control over their performance. 

    If employees are overly dependent on the actions and output of other employees or processes, they may have little control over their own performance and are almost certainly doomed to fail.

  2. Differences in performance must mean something to the business. 

    Employees must see that mediocre and high-quality performances are not rewarded equally, and that results count.

  3. Business goals must be clearly defined and adequately disseminated to employees.


    Employees should be included in the goal-making process for their buy-in.

  4. Performance must be measured regularly and reliably. 

    A clear system of performance appraisal and feedback must be in place.

  5. Employers should use variable pay as a tool in reaching ambitious business goals. 

    Business goals should be set high enough so that extra effort is needed to reach them.

As a business owner, you know that your most valuable assets are your employees. You can’t be successful without great employees, but those same employees will search for other job opportunities if they are not adequately engaged, recognized, and rewarded for their efforts.

Take time to ensure your pay strategy is retaining, motivating, and empowering your employees. For help diagnosing whether or not your compensation package is effective, see Compensation Strategy Simplified or contact your certified HR expert.

Not a current Stratus HR client? Book a free consultation and our team will contact you shortly. 

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