19 Variable Compensation Plans and When To Use Them

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There’s more to consider when designing compensation plans for employees beyond salary amounts and pay frequency. Companies should also take variable compensation, which is performance-based pay offers in addition to base pay, into account. 

Several forms of variable compensation exist, giving organizations several options for rewarding employees for meeting specific objectives or working toward company goals. A PayScale survey found that 74% of organizations offered variable compensation in some form.

Explore this list of variable compensation plans to determine what types to include in your compensation structure.

1. Acquired Skill Bonus

An acquired skill bonus, also known as skill-based pay, is a monetary bonus given for learning new skills or credentials related to a position. 

For example, an accountant who furthers their education to become a Certified Public Accountant might receive an acquired skill bonus from their accounting firm. This new credential comes with additional skills and the ability to practice more advanced accounting and financial tasks, which can benefit the firm. Therefore, the firm might award this one-time bonus for the achievement. 

2. Commission Only

Some organizations pay only commission—a type of pay based on the sales a worker makes—rather than a base pay plus commission. This type of compensation is variable because it has no set value. Instead, the worker’s pay varies based on the number of sales they make or the revenue they help produce.

Only roles that are largely sales-based use a commission-only structure, such as travel agents or traveling sales representatives. This structure can incentivize sales-driven employees to produce more sales, as their pay is typically a percentage of how much they sell.

3. Company-Paid Travel

Company-paid travel, also known as incentive travel, might be offered as a reward for individuals or teams who perform well. For example, the company might reward the culmination of a lengthy project with a paid weekend trip for teammates to enjoy together off the clock.

Company-paid travel can be a good alternative to traditional bonuses for close-knit teams who would enjoy traveling together. These trips can include team-building activities and encourage teams to take well-deserved breaks that workers may not choose to do on their own with bonus compensation. 

4. Discretionary Bonus

Discretionary bonuses are payouts made in addition to an employee’s base salary or wages. These are termed discretionary because they’re offered at the discretion of the employer. In other words, the employer decides when and why to pay a bonus.

The Fair Labor Standards Act (FLSA) also states that a discretionary bonus should not have a prior contract or agreement between the employer and employee, which may lead an employee to expect regular bonus payments.

However, these bonuses can be given for numerous reasons, including getting the title of “Employee of the Month,” gaining a new skill, or going beyond a role’s expected duties.

5. Draw-Against Commission 

Draw-against commission is a variable pay type that’s most effective for commission-based employees. This method of pay draws against an employee’s future commissions to provide them with a regular salary.

To make this type of pay work, the employer creates a banking system for earned commissions. Then, the employer advances the employee’s “salary” to them for each pay period, followed by deducting that advance from the employee’s commission bank. Some agreements allow employees to collect any extra commissions they’ve earned, too.

6. Gainsharing

Gainsharing is a type of performance-based pay based on an employee’s part in reducing costs or improving efficiency in the company. For example, a team that successfully negotiates regular reductions in vendor service costs might receive a percentage of the company’s savings in addition to their regular earnings. Gainsharing is commonly used in medical offices or hospitals to improve costs, efficiency, and patient care. 

As opposed to a bonus, gainsharing is usually a continuous form of compensation from a company.

7. Gross Margin Commission

Gross margin commission is commission calculated using the gross profit of a sale. This is in contrast to revenue commission, which is calculated based on the revenue a sale generates for a company.

In other words, this commission method removes any expenses involved in the sale, like marketing or client sign-on bonuses, making it a good choice for expense-heavy sales. Then, the employee receives their portion of the leftover amount. Therefore, the employee’s commission would be based on $9,000 if the sale produced $10,000 but had $1,000 in expenses.

8. Management By Objectives (MBOs)

MBOs are a set of goals outlined by management for employees to meet. Meeting those goals can lead to variable compensation, like commissions or bonuses. 

MBOs work great for teams that thrive on clear objectives to work toward. They can be especially beneficial for new teams or departments with individuals who haven’t had experience working together to get a feel for what’s expected of them in their new roles.

9. Multiplier Commission

Multiplier commission is commission based on an employee’s quota and how close they are to meeting quota. The employer determines what metrics to include in the employee’s quota. Then, the employee’s final commission is a percentage of their regular commission rate.

Say an employee’s commission rate is 4%. If they reach 90%-100% of their quota, their multiplier commission is 100%, meaning they receive their full commission of 4%. However, an employee reaching 80% of their quota might be subject to a multiplier commission of 90%, giving them a 3.2% commission.

Employers using multiplier commission structures usually do so when they want to evaluate an employee’s sales based on several performance metrics, like lead generation, revenue, new accounts, and contract value.

10. Pay for Performance

Pay for Performance (PfP) may be one of the better-known variable compensation types. 

Often, the term PfP is also used interchangeably with merit pay and incentive pay because of their similarities. Each of these pay types rewards employees based on their performance in some way, and the payouts can vary based on the criteria, making them variable pay. Only slight differences exist between the three terms:

  • PfP: An umbrella term to define pay based on an individual or team performance. PfP can technically be either incentive or merit pay.
  • Incentive pay: Usually a one-time award to reward an individual or team for meeting a goal.
  • Merit pay: An incentivized, performance-based award that usually leads to a permanent increase to a worker’s pay.

PfP incentivizes employees to reach specific goals. For example, an employer might offer a 5% base salary bonus when an employee gains five new clients in the current quarter. The motivating nature of PfP makes it highly useful for sales teams, but virtually any department or organization can likely find it beneficial.

11. Profit-Sharing 

Profit-sharing allows employees to have shares of their company, with their portion going toward a retirement plan. With these plans, the employee typically shares a percentage of profits saved for workers with profit-sharing plans. 

To illustrate, say a company offers 5% of its annual profits to employees with profit-sharing retirement plans. The company made $500,000 in profits the past year and has 10 employees with profit-sharing plans. Those 10 employees share 5% of the profits, or $25,000. If they all have the same allocation percentage of the 5%, they each earn $2,500 for their plans.

Companies looking to reduce their tax bill might choose this type of retirement plan, as it allows a portion of the contributions as a deduction. However, businesses must follow all IRS rules for profit-sharing plans

12. Referral Bonus

Companies sometimes pay workers a referral bonus when they refer new employees to the company. Usually, the bonus is paid only if the referral becomes a legitimate employee of the company and remains employed for a period of time. 

This type of bonus can benefit businesses without a dedicated hiring manager or those looking to reduce recruitment costs.  

13. Retention Bonus

Retention bonuses are incentives for employees to remain with a company. A company might pay an employee a retention bonus if the worker is considering leaving for a different job or if the employee’s department is closing and the company is working to find a suitable new position for the employee. 

14. Retirement Plan

A retirement plan set up by a company helps employees save for retirement. A common employer-sponsored retirement plan is a 401(k), which allows workers to contribute money from their paychecks to the plan. Often, the employer also matches contributions up to a certain amount, helping the retirement fund grow faster. 

Small businesses can offer SIMPLE 401(k) plans to employees, which work similarly to 401(k) plans but require employers to contribute either 2% or 3% of an employee’s pay. Cash-balance retirement plans are another option that moves a percentage of an employee’s annual salary into the plan. Cash-balance plans allow for higher contributions than others, helping older workers save quickly as they near retirement.

15. Revenue Commission

Revenue commission is the simplest form of commission pay. It’s based on how much revenue a sale generates, paying the employee their commission percentage from that revenue.

For example, an employee with 10% commission who makes a sale generating $8,000 revenue for the company earns $800 in revenue commission.

16. Sign-On Bonus

Sign-on bonuses are one-time payments to encourage qualified candidates to apply for and accept jobs within a company. These bonuses are typically paid immediately upon the candidate officially joining the company. 

17. Spot Award

Spot awards are bonuses paid on the spot for something an employer wants to commend an employee for. For example, an employer might offer a spot award to an employee who proactively took over some tasks for a coworker who was falling behind. 

18. Team Bonus

Team bonuses are a variable compensation type paid to a team rather than an individual, recognizing an important accomplishment made by the team. A team bonus might go to a sales team, for example, for reaching a record-breaking sales month.

19. Tiered Commission

Tiered commission is a commission structure that places commission percentages in tiers to help encourage sales representatives to close more sales.

While other forms of commission pay a flat percentage of a sale regardless of how many sales a representative makes, tiered commission has different levels of commission percentages. Salespeople might start at 5% until they close at least $50,000 in sales, followed by moving to 6% when they reach $100,000 in sales. 

Employers might use tiered commission when they want to continue motivating sales representatives to reach higher levels to earn more money from their sales. This commission structure might also benefit new companies wanting their sales representatives’ commission to grow alone with company revenue.

In Summary

Variable compensation can be crucial in a company’s quest to attract and retain talent. With the many types of variable compensation available, businesses of all shapes and sizes can find something that works for them and their employees.
For more information on company benefits, follow along with our benefits guides and articles.

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