Variable compensation optimises company and people performance

Companies are increasingly adopting variable compensation systems at different levels to ensure that everybody feels responsible towards the success of the company.

The growing trend is that IT firms are adopting a western salary mode, i.e. companies are ensuring that the salaries of senior employees as well as those associated with sales, marketing and other delivery functions become productivity/performance linked. What is your view on this?

With the industry becoming increasingly competitive, it is important to reward performers, if only to retain them. The focus is slowly shifting from rewarding efforts to rewarding results. Variable pay promotes greater transparency throughout the organisation, holding both the management and staff responsible towards each other. This results in increased productivity and effectiveness.

Is this trend likely to intensify?

Variable compensation is here to stay. However, I feel that most companies will embrace this system in phases, with the variable component of the salary going up slowly. The fixed component of the salary will eventually reduce to a level between 50 and 70 percent of the total compensation package. The rest will be performance-linked.

The real challenge lies in measuring employee performance correctly by evolving an impartial system of evaluation that is in line with the organisation’s business and culture.

Does your company have a variable pay programme in place? If yes, is this for all employees/functions or only in specific areas?

Recently we introduced variable pay system in our company at all levels in the hierarchy. For the lower and middle management, the variable component has been fixed around 7-10% of the total salary. For senior management, the performance-linked component is as high as 25% of the total salary.

What has been the reaction of the employees to this programme?

The response has been encouraging. In fact, our first initiative towards introducing variable compensation was based on a suggestion from few of our staff members. My contention is that the IT industry is composed mainly of young individuals who are more receptive to performance-linked compensation than their older counterparts.

What benefits do you hope to achieve from a performance linked compensation policy?

The benefits are all encompassing and will affect the entire organisation. Besides improving productivity and efficiency of the staff, we expect an increase in the billing rate per employee. An important intangible benefit comes in the form of higher customer satisfaction. In the IT industry, customer interaction is not limited to just the sales team. The technical team has to work in conjunction with the customer. Customer-Relations is an important feature of any sustainable business model in the IT industry and a performance linked pay will stimulate an overall increase in efficiency and accountability that will have a direct impact on customer satisfaction.

Coming to recruitment trends, has industry slump made it easier to find good candidates at lower salaries?

That is not true. I don’t agree with the general viewpoint that skills are available in plenty. Talented people are still in demand, primarily because the skills they possess are rare. Also, in the current situation, most people are afraid to take the risk that comes with a new job. That’s because, in case of downsizing, the usual tradition followed is that of "last in - first out".

As far as salaries are concerned, besides the actual compensation most candidates look for a host of intangible factors before accepting a job offer – this includes reputation of the employer, working environment, growth and learning potential, etc. So, we still need to provide sufficient compensation to attract the right talent.