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Fixed Pay = Variable People

Variable compensation has a lot of benefits, but they don’t always come easy. Incentive, both Short-Term and Long-Term, are harder to design, require more effort to communicate, and have a higher risk of administrative error than more consistent pay elements like base pay. In fact, variable pay is troublesome enough that many companies use it poorly or half-heartedly and others not at all. This can work when things are growing, and fixed pay is dragged up by the rising tide (however so slightly). But in a world of volatile markets and unpredictable futures, fixed pay can mean variable people.

When things are going well, we tend to focus mainly on the upside of incentive pay. The potential of high payouts can be motivational. Group rewards can unite staff and engage them in the new big goal. Pushing attractive payouts into the future can help fend off potential poachers and assist in the retention of valuable staff members. We look at the loss of all of the above as flaws in these plans. Most of the people we pay look at things the same way.

A hidden benefit of variable compensation is its ability to help you weather the occasional storm. For many companies using incentive poorly, the “variable” aspect is really just a delay. Employees rightfully expect to receive their annual bonus or other incentive. They budget for it and are angry when they don’t receive it. This may as well be fixed pay. It provides very little linkage to success (company or individual) and very little room for variance.

At the companies who eschew variable pay altogether, the problem can be worse. Many of these companies pay base above the median. Over the year, the compounding growth in base pay outpaces the market, their needs, and the companies’ budget. High base pay can be a great approach, but it must be managed and explicitly communicated. Errors in this philosophy can be hard to correct.

This brings us to our current situation. Tax reform has potentially given companies a bigger budget. Market volatility has created more risk. Even if stock prices for your company, or industry, aren’t particularly volatile, the swings and uncertainty tend to impact everyone. Budgets get tighter as the demands for productivity and performance increase. Compensation budgets stagnate or shrink.

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This, my friends, is where fixed pay equals variable people. When your incentive programs function as entitlements, or your base pay levels are designed to lead a growing market, pay adjustments can be almost impossible. Without an effective variable element, the only way to reduce your pay budget is to reduce your headcount. Rather than variable pay, you now have variable people. This dilemma immediately impacts culture and morale while also acting as lead weight when you can finally start growing again.

We haven’t seen the impact of this issue in the age of social media. Will Glassdoor and similar sites be swamped with negative reviews? Will industries’ message boards be filled with posts from good performers who had to be cut because of bad conditions? My guess is that it will be worse than we expect.

Complaints will be amplified. Companies who were able to avoid cutting staff by adjusting variable pay will become the darlings of their industry (and of reporters looking for “good news” stories.) All of this is, of course, avoidable by doing some heavy lifting now and following it with some exceptional communications. Variable pay may be hard, but variable people is a nightmare. How is your company preparing for the inevitability of uncertainty?

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