A Closer Look at Variable Pay for Growing Teams

Compensation strategies continue to evolve as companies look for more meaningful approaches to recognizing employee contributions. For instance, organizations can incorporate variable pay programs as part of their overall compensation and rewards strategy. Companies can use these pay programs to recognize their employees' performance, motivate teams, and support business growth.

A well-designed variable pay program supports talent retention and keeps your growing team aligned and focused on common goals. This article explains what variable pay programs are, highlights variable pay program examples, and shares tips for designing an effective plan for your business.

What is a Variable Pay Program?

A variable pay program serves as compensation in lieu of benefits, allowing employees to earn more through performance-based incentives. Unlike a set salary, variable pay is flexible. The payout depends on factors such as individual performance, team achievements, or overall business results. The goal is to motivate and reward employees while maintaining a focus on company priorities.

Is Variable Pay the Same as Incentive Compensation?

Incentive compensation is a type of variable pay, but it's not the same:

• Variable pay includes any compensation based on performance, results, or business goals. It's a broad category and designed to be flexible. Payouts may vary from year to year, depending on factors such as company success and budget.

• Incentive compensation refers to structured, goal-driven programs with specific payouts. For example, a salesperson could receive a $2,000 bonus for securing $100,000 in new business, based on pre-established goals and criteria.

Some types of compensation can show up in both variable pay and incentive compensation programs. The difference lies in structure and intent. If the reward is tied to specific goals, it falls under the category of incentive compensation. If it’s discretionary or based on broader company outcomes, it’s variable pay that's not always incentive-based.

Types of Variable Pay Programs

You can structure variable pay programs in different ways. Some programs take individual performance into account. Others focus on broader outcomes such as retention or company success. The right choice depends on your company’s objectives, team setup, and budget. Here are some variable pay program examples:

1. Bonuses: These include signing bonuses for new hires and retention bonuses for current staff. Some organizations provide end-of-year bonus considerations based on company performance. Others prefer discretionary bonuses to recognize individual contributions. Not all bonuses require targets—sometimes, they’re simply a way to show appreciation and keep employee morale high.

2. Commissions: These are a traditional form of compensation commonly used in sales roles. Employees earn additional pay based on the revenue they produce or the number of deals they close. Many programs also include tiers or accelerators to enhance motivation and reward top performance.

3. Equity or Stock Options: Equity gives employees partial ownership in the company. This can be a big draw, especially in startups. Even if equity options are not tied to specific performance goals, they create an incentive for employees to stay and contribute to the company’s success.

4. Profit-sharing Programs: These reward teams when the company does well, for example, annual payouts. A profit-sharing program is a way to make your employees feel invested in the bigger picture, without tying the reward to individual performance.

5. Team or Company-Wide Performance Incentives: Sometimes, the most effective way to drive results is to reward the entire team. These kinds of incentives kick in when your organization hits a specific target. Examples include a department exceeding quarterly goals or your company reaching a significant milestone. This type of program encourages collaboration and a sense of shared success.

How to Design an Effective Variable Pay Program

A strong variable pay program does more than reward your team's performance. It creates clarity, encourages consistency, and scales with your team. The right program requires good planning, clear communication, and room to evolve. Here’s how to build a flexible program that works now and grows with your company:

1. Start with a Clear Purpose

Defining your intention early on helps you choose the right mix of incentives. It encourages you to set meaningful criteria for earning the variable pay. Ask yourself the following questions:

• Why are you building this program?

• Is your goal to keep your best performers, encourage team motivation, or boost growth in a key area?

2. Build a Structure that Reflects Real Impact

Design your program around outcomes that matter. These may include individual milestones, team contributions, or business-wide performance results. The primary goal is to reward efforts that contribute to the company's progress. Keep the criteria simple, measurable, and relevant to the specific role or position.

3. Balance Consistency with Flexibility

Aim for a structure that’s easy to follow but flexible. You may need different models for the operations lead and the sales manager. What matters is that the program feels fair and transparent.

4. Be Clear from the Start

Everyone on your team should understand how the program works. This includes what employees need to do, how payouts are calculated, and when they’ll be paid. The clearer the communication, the more trust and motivation you’ll build.

5. Check In and Evolve

No compensation plan should be set in stone. Revisit your variable pay program regularly to check what’s working and what needs adjusting. Use data and employee feedback to refine the details. This keeps your program aligned with your company's goals.

Build and Scale Your Variable Pay Program with Justworks

A well-designed variable pay program can boost employee morale, drive performance, and help retain top talent. Justworks provides payroll management, compliance support, and access to high-quality employee benefits, giving you the tools to simplify operations and build a program that motivates and rewards your team. How could a variable pay program, supported by Justworks’ tools, help you better motivate and reward your team? Begin your journey with Justworks today to discover the benefits.