How To Use Variable Pay In Your Small Business: A Guide To Offering Variable Pay

Everyone knows the importance of employee compensation. It’s an essential cost and influences performance. However, what is often overlooked is the impact that variable pay can have on your employees.

With variable pay, you can offer incentives to high-performing employees to increase their engagement. With this article, we will explain what variable pay is and how you can implement it in your small business.

What Is Variable Pay?

Variable pay is a portion of an employee’s salary that is at risk for good performance. It’s paid in addition to a base salary, and in most cases, it is not guaranteed or part of an employment contract.

Typically, you’ll tie variable pay to company and individual goals. That way, employees can work towards increasing their variable pay each year and feel a sense of accomplishment when they succeed.

How Variable Pay Works

Variable pay is generally calculated based on company or individual goals. In some cases, you may tie it to a percentage of an employee’s salary. This way, if you set goals that employees meet, they’ll receive a percentage of their base salary in addition to their normal compensation.

For example, if you set a sales goal for each sales reps, you can give them a percentage of their sales as a percentage of their base salary. If you decide each sales rep should receive 10% of their base salary for hitting their goals, but they achieve 15% of their set goal, you would pay them an extra 5% of their base salary.

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It’s important to tie the reward to the goal to make it more effective. You can do this by offering a certain amount based on how easy or difficult a goal is. For example, if one of your sales reps has a difficult goal, you can offer to increase the percentage of their base salary they’ll receive by 10%.

What Are The Different Types Of Variable Pay?


Bonuses can be awarded as a one-time payment or part of a regular, recurring payment. Bonuses are often used to reward employees who have achieved specific business goals or have demonstrated exceptional performance that has benefited the company.


You pay employees commissions when they sell goods or services. Commissions can be calculated as a percentage of the sales price or the gross profit of the sale.

Restricted Stock

Restricted stock is an equity reward that you grant to employees in exchange for service. Restricted stock grants the employee a set number of shares of company stock that vest over a set period of time.

Stock Options

Stock options are a non-cash incentive that allows employees to buy company stock at a specific price.

Pros And Cons Of Variable Pay

Pros of variable pay include:

  • It can help you recruit top talent
  • It is a great way to reward hard work
  • It provides employees with a sense of security
  • It can be used to increase employee engagement
  • It is an excellent tool for managing employee salary costs

Cons of variable pay include:

  • It is expensive to administer
  • It can lead to over-compensation
  • It can create a culture of distrust
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How To Implement A Variable Pay System

Before you implement a variable pay system, make sure you have the proper metrics in place to track performance. First, determine the types of employees you want to incentivize.

Next, determine goals for each employee group. Once you have these in place, it’s time to set metrics. Be very specific about the metrics you want to measure. Next, select the type of variable pay you want to use.

You can either let each employee decide what type of variable pay they want or you can pick it for them based on the metrics you have chosen to measure. Finally, let employees know what metrics are being measured and let them know what type of variable pay they can expect.

Track Performance And Make Timely Payments

Regardless of the type of variable pay you’re offering, you should track performance and make timely payments. If you do this, you’ll be able to boost employee engagement and satisfaction. To keep track of performance, you should use a method that works for your business.

If you’re in a sales related industry, for example, you can use sales-tracking software or apps to monitor progress and see which employees are performing well.

In other industries, you can use a mix of employee performance reviews and periodic check-ins to determine who is meeting objectives and who needs assistance in improving performance.

Incorporate Employee Feedback

If you’re offering a type of variable pay tied to company or individual goals, your employees likely have some say in the goals they set and are responsible for. In this case, it’s important to incorporate feedback from your employees. You should encourage employees to provide feedback in a variety of ways.

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Feedback can come in the form of surveys, one-on-one meetings, or team meetings where employees share ideas and suggestions. When employees share their feedback, incorporate it into the variable pay plan.

This way, employees feel like they have a say in the goals they meet and the rewards they receive. They’ll also feel like their voice matters and that you truly care about their feedback.

Write A Variable Pay Policy

Before you write a policy, you first need to decide what type of variable pay you want to use. You then need to define each type of variable pay as well as the metrics you’re using to measure performance.

Finally, you’ll need to include how much money employees can expect to receive and for how long. This varies depending on the type of variable pay you are using.

Summing Up

Variable pay is a great way to engage employees and boost company culture. However, it can be expensive and difficult to administer. That is why it is important to track performance and make timely payments.

If you have employees that are highly engaged, it is important to use variable pay as an incentive to keep them engaged. You can use variable pay to reward employees for exceptional performance or hard work. With variable pay, you can reward high-performing employees and encourage others to perform at their best.

It’s important to track performance and make timely payments to ensure employees know what goals you’re assessing and when rewards will be distributed. In addition, it’s important to incorporate feedback from employees to make the system more fair and promote engagement among employees.

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