variable pay

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Is that proportion of total remuneration not consolidated into base pay which has to be re-earned in each pay period (week, month, or year). Examples of variable pay include sales incentives, an annual profit share, or a cash bonus based on estimates of employee performance. The key features are that payments vary upwards or downwards, depending on performance, and that they are discrete: after payment, the slate is wiped clean and employees have to earn their commission, profit share, or bonus afresh. There has been increased interest in variable pay amongst employers and management consultants as a means of importing greater flexibility into labour costs and sharpening financial incentives for employees. Advocates of the new pay tend to recommend variable pay and urge that base pay and benefits are kept to a minimum in order to release a larger proportion of total earnings for the reward of performance. Their recommendation, essentially, is to make earnings more risky or ‘variable’ out of a belief that this will incentivize workers and secure higher levels of output, quality, or profit. Critics argue that variable pay increases employee insecurity and is more likely to encourage employees to look elsewhere for a more secure position with assured remuneration, especially when employees have dependants and financial commitments, such as a mortgage.

Subjects: Human Resource Management.

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