Pic: IMAGESBAZAAR

Variable pay is increasingly been used as an effective tool to communicate the linkage between individual performance and an organisation's business objectives, as well as to drive and reward higher performance.

In emerging markets like India, where talent performance and retention are key business drivers, variable pay, especially in the form of incentives, bonuses and stock options are widely used across sectors. Yet designing and implementing effective variable pay plans continues to be a challenge and require HR professionals to have a good understanding of business strategy and organisational culture.

Variable pay today is a well accepted practice to recognise and reward employee contribution towards company growth. Also, it is a very effective tool to reward/retain performers and focus employees towards individual and organisational goals. It can be designed to meet both short-term and long-term goals.  However, what is the importance of variable pay in emerging markets like India where talent performance and retention are key business drivers? "Irrespective of whether it is an emerging or mature market, variable pay is an extremely important component of the pay package. The variable pay is tied to both an individual's performance as well as the company performance. The beauty of a variable pay is such that an employee not only invests in his/her personal success but also in the company's success. If the company charts a growth curve, the employee benefits by getting to take home incentives in excess of 100 per cent which is not the case with fixed pay. Mostly, the variable pay component is lower at the base of the pyramid and increases at the top. In markets like India which are fast losing the cost competitiveness and with double digit inflation, the variable pay holds a lot of importance," states Sakaar Anand, vice president - HR, CA Technologies India.

The economic crisis, with its imperative to reduce costs and to balance short and long-term performance effectively, gave business leaders a great opportunity to reassess the combination of financial and non-financial incentives that will serve their companies best through and beyond the downturn. This, however, needs to be communicated effectively to the employees. "Part of the success of variable pay plans lies in communication in addition to timely and correct payouts. To ensure motivation and drive performance the organisation needs to be sure that the plans are properly understood by the employees. In Uninor, HR and line managers own the responsibility of communication and ensure that targets/variable pay plans are cascaded down at a speed that is required.  In addition, the plans are communicated through using various channels such as company intranet, town halls and morning briefing meetings to sales employees," opines Elisabeth Stene, chief human resources officer, Uninor.

Performance linked bonus can drive performance and retention up to a point and in a short-term. This cannot be a permanent talent retention process. The biggest motivator for retention is to create more and continuous challenges in the business by the leaders which will motivate the team and also provide growth opportunities in the organisation. During a slowdown or economic crisis, variable pay is the first thing to get affected. Why does it take a backseat then? "There couldn't be a better time to reinforce more cost-effective approaches. Money's traditional role as the dominant motivator comes under pressure from declining corporate revenues, sagging stock markets, and increasing scrutiny by regulators, activist shareholders, and the general public. The data from various HR directors suggest that many companies have cut remuneration costs by 15 per cent or more," asserts Ramakrishnan Ramamurthy, president, Mytrah Energy (India) Limited.

It's been witnessed that most HR managers do not have a good understanding of the business strategy and organisational culture and therefore designing and implementing effective variable pay plans continues to be a challenge. "The yield should be directly proportional to the payout and organisational achievement. In Uninor, the targets in the variable pay plans are purely financial and reflecting the overall business goals of the company. It ensures that not only management, but also HR as well as all employees, are aware of and committed to achieve the company targets," adds Stene. All said and implemented, success of any variable pay plan will depend on how well the plan has been thought through factoring in the organisation's short-term and long-term strategy.

- Manoj Reddy