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Certified Compensation & Benefits Manager

Quantitative Tools for Compensation

In order to plan a strong, effective and attractive compensation plan various quantitative tools are used by organizations.

Modern organizations are making variable compensation a significant percentage of employee compensations in the form of profit sharing, bonuses, and stock options. This ensures that employees prosper when the company prospers. The higher the position level within the organization, the more likely the employee will receive significant portions of his or her salary in variable compensations.

Variable Compensation plan, as the name suggests, is a plan in which the level of the award varies with some metric.  This metric is normally tied to the company or unit performance.  It also may have an individual performance metric as well.

There are typically two main categories of variable compensation plans.  One is a bonus plan and the other is an incentive plan. A bonus plan is one where the bonus is awarded after a fact which has very little or no incentive value. The employees see it as an entitlement. An incentive plan is a plan that is tied to some level of performance. The employee is rewarded with a payment that is predefined and non discretionary. The reward is paid when actual performance meets or exceeds predefined goals. While many companies include long term incentive plans for executives, generally incentive plans that are short term in nature covering the majority of employees are widespread and popular. Short term means no more than one year in duration.

The connection between performance and rewards is often called the line of sight or the line of influence. It refers to the fact that in order to be motivated in an organizational setting, people must see how their behavior influences a performance measure that, in turn, drives the allocation of a reward.