Strategic Human Resource Management

Section Four

Variable Compensation

Variable pay plans have been implemented by a number of
companies, such as Xerox, Westinghouse, and Nucor Steel. A
major purpose for such plans has been to create among
employees a sense of shared destiny. Such plans seek to
accomplish this purpose by linking a portion of employee
compensation to various performance measures. A common
element of such plans is the concept of having a portion of
employees’ compensation “at risk.”^38 The rationale for variable
compensation is appealing and, at first glance, seemingly
uncomplicated. However, there is a level of complexity to these
programs that must be understood.

An important consideration of variable pay plans is the
form they will take. The first form is an increment to base pay,
which is frequently called add-on. Bonuses based on company
performance would constitute a form of add-on variable pay.
The second is at-risk pay, which is normally operationalized by
reducing employees’ base pay by a certain percentage and then
allowing them to receive various amounts of that percentage
and more, depending on performance measures. The third
form, “potential base pay at risk,” is related to the second. This
form of variable pay might be operationalized in situations in
which the company has a tradition of steady raises, for
example, averaging approximately 6 percent per year. This