Section Fourpractice would be changed by allocating only 3 percent as a
regular raise. The remaining 3 percent is set aside for allocation
with greater increases if performance targets are met or
exceeded. While there are no strict guidelines for identifying
the circumstances in which these forms of variable pay are
implemented, companies encountering heavy pressure to
reduce labor costs are more likely to use at-risk variable pay.
Companies dealing with less pressure might use add-on pay to
pave the way for a later introduction of other forms of variable
pay. They might also use add-on pay for very high performance
standards.^39
Another element of complexity with variable pay involves
the measures of performance to which pay is to be linked.
Unfortunately, the use of some seemingly rational performance
measures can lead to very dysfunctional results. For example, if
one links variable pay to the profitability of an insurance
company, claims representatives may not pay customer
accident claims as they should. If these same representatives
are paid according to customer satisfaction, however, they may
be too generous in the settlement of claims. In any event, the
measures should reflect the organization’s overall strategies.
The range of measures may include profitability, improvements
in quality, various financial ratios, and customer satisfaction. It
is recommended that productivity not be defined in too narrow
a fashion since some units could receive pay increases while