How do you monitor and evaluate the effectiveness and impact of your variable pay plan?

2 Choose your variable pay plan type

There are different types of variable pay plans, such as bonuses, commissions, profit sharing, stock options, or recognition awards. Each type has its own advantages and disadvantages, depending on your industry, culture, budget, and workforce. For example, bonuses can be flexible and easy to administer, but they can also create a short-term focus and foster competition. Commissions can incentivize sales, but they can also discourage collaboration and customer loyalty. Profit sharing can align employees with the company's success, but it can also be affected by external factors and dilute individual accountability. Stock options can create a sense of ownership and retention, but they can also be complex and volatile. Recognition awards can boost morale and engagement, but they can also be subjective and inconsistent. You need to choose the type of variable pay plan that best suits your goals, metrics, and culture, and balance it with a fair and competitive base salary.

4 Monitor your variable pay plan regularly

A variable pay plan is not a set-and-forget solution. You need to monitor its performance and impact on a regular basis, using the data and metrics you defined earlier. You need to track the outcomes of the plan, such as sales, profits, quality, customer satisfaction, or innovation, as well as the behaviors and attitudes of your employees, such as motivation, engagement, collaboration, or turnover. You also need to compare your results with your benchmarks and targets, and with the industry standards and best practices. Monitoring your variable pay plan will help you identify its strengths and weaknesses, and adjust it accordingly.

5 Evaluate your variable pay plan periodically

Besides monitoring your variable pay plan regularly, you also need to evaluate it periodically, using a more comprehensive and systematic approach. You need to review the goals and metrics of the plan, and see if they are still relevant and aligned with your strategic objectives. You need to analyze the data and feedback from your employees and stakeholders, and see if they are satisfied and engaged with the plan. You need to assess the costs and benefits of the plan, and see if they are worth the investment and risk. Evaluating your variable pay plan will help you measure its effectiveness and impact, and decide if you need to modify or replace it.

6 Improve your variable pay plan continuously

A variable pay plan is not a static or perfect solution. It is a dynamic and evolving one, that needs to adapt to the changing needs and expectations of your business and your employees. You need to improve your variable pay plan continuously, using the insights and lessons learned from your monitoring and evaluation processes. You need to update your goals and metrics, refine your payouts and criteria, enhance your communication and feedback mechanisms, and address any issues or concerns that arise. Improving your variable pay plan will help you maintain its relevance and value, and optimize its performance and impact.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?