What is a Variable Pay Incentive?

What is a variable pay incentive, or VPI? This alternate but relatively common method of compensation determination is sometimes loved and sometimes dreaded. The propensity to enjoy it seems to depend chiefly on the individual worker’s personal preferences and abilities. Here is your closer look at the VPI and how it is usually administered.

Traditional Compensation VS. VPI

In traditional compensation methods, it’s a straightforward matter. The employee does their time and fulfills their duties, and as a result, receives a clear-cut hourly or salary-based payment. VPI provides an alternate method of compensation determination that is typically an add-on to these aforementioned, base, traditional pay methods. In other words, the worker will usually still receive an hourly or salary-based pay, but this is likely reduced as a significant percentage of their pay is set to come via VPI compensation.

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How it Works

As its name represents, the variable pay incentive is a variable type of compensation that most often varies based on output, production, or sales results. This is considered an attribute of what is referred to in the industry as “performance-based pay.” The idea is that the more and better that an employee performs, the more they can expect to make. This is by way of either healthy raises, temporary pay boosts, and even other compensation tools. For best results, according to the Society for Human Resource Management, “there must be a direct line of sight between employee performance and tangible rewards.”

Examples in Action

To help provide a little more insight on the matter, here are a few, quick examples of ways in which this compensation practice is often employed.

Reactive Cash Bonuses

Caitlin works for a door parts manufacturing company. She performs quality control by pulling random samples of just-manufactured parts and deeply analyzing them for quality. The company can just get enough checks in on her shift to accurately gauge the quality of thousands of parts made during that time period.

In order to incentivize the completion of just a few more checks every day by Caitlin and her like-dutied associates, her company then offers a VPI consisting of cash bonuses paid for extra quality checks done during any given shift. As a result of this particular VPI campaign, the workers are provided a higher earning capacity while the manufacturing company is able to seek just a little bit more production from this important group of workers.

Reactive Raises and Stock Shares

A large lawn and garden supply chain seeks to get more from its workers in a variety of ways: sales, service, and individual store incomes. In order to do so, the company employs a new VPI plan that not only includes an aggressive, reactive pay raise system, but also a reward system of company stock shares offered in response to outstanding employee efforts. In the end, the employees that choose to produce more are acknowledged and encouraged in doing so.

VPI approaches offer employers an alternative, creative way to improve employee-dependent results of nearly any kind. Versatility is always a plus in this area of business. These are the basics of what the variable pay incentive is all about.