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Variable Pay Essay

909 words - 4 pages

Timothy Hasson
Discussion Board 2
BUSI 642
Liberty University

Q2) What are some of the pros and cons of linking pay to objective criteria that are important to the organization such as quality control measures, profitability, and low turnover?
Introduction
Today over 80 percent of US firms have implemented some type of variable pay program for the non-executive employee population (Merriman and Deckop, 2007, p. 1027). The high percentage of firms deploying variable pay programs clearly demonstrates that there is sound business benefits associated with the practice. The focus of this work is to discuss both the advantages and disadvantages of linking pay to objective ...view middle of the document...

255). From a staffing standpoint, sorting has the effect of attracting high performers into the organization, while at the same time less productive workers opt out. Moreover, the remaining workers tend to increase output in alignment with incentives.
Additional benefits from variable pay include workforce flexibility, performance management practices, and enhance teamwork. Relative to workforce flexibility, variable pay programs can assist organizations in battling through tough economic conditions. For example, during the recent economic downturn firms that have well-structured variable pay programs could leverage the scheme by reducing the overall contribution (payout) instead of reducing the workforce.
Disadvantages (cons)
There are a number of potential disadvantages associated with variable pay plans linked to objective criteria including incongruent linkages, perception of entitlement, and impacts associated with no payouts. Concerning incongruent linkages two aspects arise that require discussion. First, if the established objective criteria are not aligned with the required individual, team, or plant performance requirements then employees will not see the linkage and therefore not work to those ends. Secondly, if the pay program is not aligned to the established culture the program can be seen as unfair and again employees will not work with maximum effort to achieve goals.
One key aspect to incentive programs is for firms to foster an environment and culture where the plans are not perceived as entitlements. If the programs are perceived as an entitlement, if the payout is less than expected or not paid out at all employees may reduce their work effort.
Through bad design, economic conditions, or failure to achieve set forth objectives, firms may not payout an incentive plan. This can be frustrating for the firm and employee and lead to challenging employee relations and performance issues. This...

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