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I've come across differing ways of positioning/communicating Variable/Incentive pay.
This is either as a percentage of Base Salary or a percentage of Total Compensation.

In my experience the approach to this depends on whether the audience is the Sales community or not.  Sales people often refer to their on-target incentive/commission amount as a percentage of their total compensation.  On the other hand, non-sales people, who more commonly would have some kind of bonus plan as part of their compensation package, would think of this as a percentage of their base salary. 

In a small company such as mine, we have taken the approach that we communicate any kind of variable salary/bonus/incentive pay/sales commission as a percentage of Base Salary.  It seems to me to be easier to communicate, understand and administer. 

I would be interested to know how others in the Compensation Exchange community approach this and whether there is a common language. 

Many thanks in advance,
Steve 

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Replies

  • Hi everyone, many thanks for your responses, they have helped enormously and given me some clarity and insight into  markets I've not yet been close to.  I am very grateful for you taking the time to respond. 

    Steve 

  • Philipp provides a good summary of ways to think about base fixed pay v. variable pay.  Certainly when we think about mix it is in terms of % of total comp.  As to communicating about variable pay I agree with Alberto; it is easiest for employees to understand variable pay as a percentage or fraction of base pay.  The statistics that Philipp mentions bear this out.  To Anders point; expressing variable pay as a number of months is in fact expressing it as a fraction of the annual salary so this is consistent with the percentage of base pay approach too.

    Good discussion.

    Zachary

  • Hi Steve,

    the percentage on top of Base Salary is the most common approach, easiest to understand and administer. 

    In the market you will find the following four principles to represent variable compensation:

    1. Variable compensation in % of the target total income, e.g. 80% fix | 20% variable
    2. Variable compensation in % on top of base pay, e.g. 100% fix + 25% variable pay
    3. Variable compensation as a multiple of the monthly salary, e.g. 12 monthly salaries + 3 salaries variable pay
    4. Variable compensation as a fixed amount on top of base pay 100% fix + fixed amount of $ / € / £ / ...

    I remember a WW survey from a couple of years back where 75% of the responding organisations replied to using option 2 for their employees in professional and managerial roles.

    If you have a homogeneous group of roles like "customer service agents" with (historically grown) different base salaries, it might be prudent to use a fixed amount for their variable pay, thus treating everyone in the same way when it comes to bonus pay outs. Anything related to their base pay might be seen as unfair because of the different level of guaranteed pay.

    Once you have a job grading / levelling system in place and the number of evaluated jobs increases per grade, it might be a good idea to link a variable pay percentage or fixed amount to the grades / levels to ensure equal pay.

    Assuming that employees within the sales function are mainly motivated by external stimuli like cakes and carrots ;) we should be able to easily show them their base salary and the amount of money they would get if they reached their targets at year end. I think all the mentioned options will do for this purpose, although I would prefer option 2 and 4.

    Best Regards

    Philipp

    • Hi,

      Phillipp made a very good summary of concepts. I might add, that when you move into some other markets, the situation may change a bit. In India, you have to differentiate between base and basic compensation when building your incentive scheme. In many countries in the Far East, the dominant practice is Phillipp's 3. i.e. bonus as expressed in multiples of monthly salaries. The practice also differs as to how a bonus is calculated, individual goals vs. corporate goals.

      Regards

      Anders

    • Thanks Anders, :)

      we will see these differences even within countries, e.g. when looking at different industries. At least in Germany some regularities stem from the underlying labour agreements.

      If detailed research by academia was done, we might even see a correlation between a firm's culture, the stability of its business model and the variable pay model chosen.

  • Hi !!

    I agree with you.

    Typically, when we define variable pay, first we think in total target compensation (fix + variable target) and define a reference value according to the market and internal equitiy. After that, we think in the appropieate mix Fix-Var (typically 80-20, 50-50, 20-80; not agressive, intermedie, agressive variable). In this zone we use the concept total target compensation ana a variable as a part or it.

    But, to communicate and administrate, I prefer the variable as a percentage of the base salary. In this way, your variable will be always update due to it is a % of the employee base salary (you change base salary and automatically change de amount of variable).

    Regards !

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