compared with 29 percent who mentioned low compensation, 13 percent who men-
tioned limited authority, and 8 percent who cited personality problems.^68Variable-Pay Programs: Improving Productivity
A large body of research suggests that pay is far more motivational than some motiva-
tion theorists such as Maslow and Herzberg suggest.^69 Consistent with this research,
managers generally look at ways to manipulate pay to improve performance by con-
sidering a variety of incentive schemes. Some of these are individually based, some are
team based, and some reward all members of the organization for working together
toward productivity goals. The rewards used are all forms of variable-pay programs.
What differentiates these forms of compensation from more traditional programs is
that they do not pay a person only for time on the job or seniority. Instead, a portion of
an employee’s pay is based on some individual and/or organizational measure of per-
formance. Unlike more traditional base-pay programs, with variable pay there is no
guarantee that just because you made $60 000 last year, you will make the same amount
this year. Instead, earnings fluctuate annually, based on performance.^70
The number of employees who have variable-pay programs has been rising in
Canada. A 2005 survey of 360 firms by Hewitt Associates found that 81 percent of
them have variable-pay programs in place, compared with 43 percent in 1994.^71 That
same year, 80 percent of large US companies had some form of variable-pay program.^72
About 22 percent of Japanese companies have company-wide pay-for-performance (or
variable-pay) programs.^73
These programs are more common among non-unionized companies, although
more than 30 percent of unionized companies had such plans in 2002.^74 Prem
Benimadhu, an analyst with The Conference Board of Canada, notes, “Canadian unions
have been very allergic to variable compensation.”^75 Under variable-pay programs, indi-
viduals are not guaranteed specific annual wages, making their work experience riskier.
People paid under a variable-pay structure may worry about not being able to predict
wages ahead of time. However, the Conference Board study suggests that in a unionized
setting, variable pay is used as an add-on to base pay, which means there is somewhat
less uncertainty about wages. Those working under a variable-pay structure may also
be concerned that factors out of their control might affect whether bonuses are awarded,
and whether rewards are set by political processes rather than objective factors.
Variable-based pay can be applied at individual, team, and company-wide levels,
making it possible to link rewards to the appropriate level of performance. Below, we
briefly describe some examples of incentives at these different levels of the organization.Individual-Based Incentives
Piece-Rate Wages Piece-rate wages are one of the earliest forms of individual per-
formance pay. They have long been popular as a means for compensating production
employees. In a piece-rate pay plan, employees are paid a fixed sum for each unit of
production completed. When an employee gets no base salary and is paid only for what
he or she produces, this is a pure piece-rate plan. People who work at baseball parks sell-
ing peanuts and soft drinks frequently are paid this way. They might get to keep
25 cents for every bag of peanuts they sell. If they sell 200 bags during a game, they
make $50. If they sell only 40 bags, their take is a mere $10. Sales associates who are paid
commissions based on sales also have a form of piece-rate pay plan.
Many organizations use a modified piece-rate pay plan, where employees earn a
base hourly wage plus a piece-rate differential. For example, a legal typist might be paid
an hourly wage plus a certain rate per typed page. Or a sales associate might be paid a
base salary plus commissions on sales. Such modified plans provide a basic security
net, while still offering a productivity incentive.126 Part 2Striving for Performance
piece-rate pay plan An
individual-based incentive plan in
which employees are paid a fixed
sum for each unit of production
completed.
variable-pay programs Reward
programs in which a portion of an
employee’s pay is based on some
individual and/or organizational
measure of performance.