Variable compensation how they have impact on organisation, retain employees, motivate employees and its advantages and disadvantages it has to when doing external comparison on the company This presentation is good to business studies on student

1. DHR 401
COMPENSATION MANAGEMENT

2. VARIABLE COMPENSATION
• Meaning of variable compensation
• Significance of variable compensation
• Types of variable compensation
• Merits and demerits of variable compensation
• Rules for administering variable compensation
• Factors to consider before introducing variable compensation

3. Definition of variable compensation
• Variable compensation is the pay a firm gives staff based on their
results.
• Typically, it comes in addition to fixed base pay.
• This pay comes in various forms, including: Bonuses and
Commissions.
• It is an incentive on top of a base salary that's used to motivate and
retain employees. Variable pay is based on employee performance.
When a salesperson meets or exceeds their quota, variable
compensation gives them a boost to their salary.

4. Definition of variable compensation
• Variable pay is often based on two main factors: your own
performance and your company’s performance. So, most schemes
evolved by companies have a target-setting and actual payout based
on that combination. Variable pay is one of the five main components
of total rewards in any organization and is usually a percentage of
fixed pay.
• Employers typically pay employees variable pay for success related to
the personal, team, or company performance. Variable compensation
can be communicated in advance as an incentive, or presented as a
reinforcement or bonus after the fact. Many employers compensate
employees with variable pay in the form of cash, stock, or paid time
off from work.

5. Assumptions about variable
compensation

6. Types of Compensation Plans

7. Types of Compensation Plans

8. Suggestion systems
• Rewarding suggestions which reduce workload, save time and costs
etc is a method organizations use to stimulate creative thinking
among employees.
• Problems:
• Resentment from supervisors
• Jealousy from fellow employees.

9. Difference between basic pay and variable pay
Basic Pay
• Income received in exchange for
performing daily job duties.
• Based on job evaluation
• It is a fixed amount of money,
which remains the same for every
paycheck.
• It is one component of the total
compensation
• The rate can be stated as an hourly,
weekly, monthly, or annual rate.
Variable Pay
• Pay given over and above basic
pay
• Given as an incentive for better
performance
• Based on individual or group
performance; profits or
competence/skills/knowledge

10. Advantages of variable pay
 Motivates employees
 Increase employee commitment to the organization -identify with its mission and values
 Change organizational culture - performance and results oriented
 Discriminate consistently and equitably on the distribution of rewards to employees according to
their contribution
 Reward hard-working employees, thereby motivating them.
 Deliver a positive message about the performance expectations of the company
 Emphasize individual performance or teamwork as appropriate.
 Improve the recruitment and retention of high quality staff.
1/2/2023 Prof. Harriet Kidombo, University of Nairobi 10

11. Disadvantages
Difficult to measure individual performance objectively
Subjectivity may lead to unfair assessments
Can encourage people to focus only on tasks that will earn
them rewards quickly
Compromises quality and long term issues
People end up working for money only
Financial rewards may work for some and not others
Can lead to pay rising faster than performance if the control
systems are not strong enough.
1/2/2023 Prof. Harriet Kidombo, University of Nairobi 11

12. Rules for successful variable compensation
 Clarify targets and standards of performance to individuals
 Individuals should be able to track their performance against targets and
standards
 Be able to influence their performance by changing their behaviour or decisions
 Be clear about the rewards they will receive for achieving the required end
results
 The rewards should be meaningful enough to make the efforts required
worthwhile.
1/2/2023 Prof. Harriet Kidombo, University of Nairobi 12

13. EMPLOYEE OR FRINGE BENEFITS

14. Meaning of fringe/employee benefits
• The term fringe
according to Webster
Dictionary is “an
ornamental border, an
edging, trimming or a
margin”.

15. Genesis of fringe benefits
• The term “fringe benefits” was first used in 1943 by members of the
War Labor Board. The board, restrained by the government's
stabilization program, was unable to allow direct wage increases but
was willing to approve non-inflationary indirect benefits.
• Fringe benefits are now becoming the heart and soul of the
workplace. And job candidates are taking notice.
• acting as deciding factors for candidates who are considering new job
opportunities.

16. Genesis of fringe benefits
• During World War II, the U.S. government faced inflation.
• Factories were producing mostly war equipment hence fewer goods
for daily consumption.
• The shortage raised the costs exponentially, so lawmakers tried to
help tackle inflation by limiting the maximum hourly wages a worker
could receive. The idea was that by putting a ceiling on Americans'
earning potential, it could trickle down into other areas of the
economy.

17. Genesis of Fringe Benefits
• Employees and employers were unhappy and it was difficult to hire
and keep talented workers with low wages.
• Employers became creative and began offering extra incentives that
were “on the fringe" of cash wages, like paid vacations and pensions.
• These benefits complied with the law as it provided employees
something valuable, and employers attracted and retained talented
employees they needed.
• The idea of “fringe benefits” took off from there and by the late
1940s, benefits became a mainstay of labor negotiations as they
became entrenched even deeper into workplaces everywhere.

18. Changing Workforce, Changing Benefits
• Benefits are not constant but change as demographics and
composition of the workforce changes.
• Gender and age have led to benefits such as subsidized childcare,
remote working, and paid maternity leave as more women enter the
labour force and more recently, paternity leave

19. Types of fringe benefits
• Common benefits include:
• Statutory benefits, like health insurance
• Retirement benefits, like NSSF
• Asset benefits, like the use of company
phones, cars, or planes
• Leave benefits, like paid sick leave or
maternity/paternity leave
• Flexible benefits, like remote working or
four-day-a-week schedules
Fringe
benefits
sometimes
comprise up
to one third
of the
average
employee's
total
compensation

20. Types of Fringe Benefits
• Commuter benefits, like public transportation passes
• Parental benefits, like onsite childcare or paid maternity leave
• Financial benefits, like student loan repayment or employee discounts
• Developmental benefits, like mentor programs or tuition
reimbursement
• Wellness benefits, like after-work yoga classes or gym memberships
• Supplemental health benefits, like add-on coverage for accidents,
critical illness, disabilities or hospitalization etc.

21. Types of Fringe Benefits
• Car loans
• Entertainment facilities, holidays, foreign travel, telephone
• Security (insurance, medical facilities, children’s education),
• Work benefits (office accommodation, secretarial services,
management training, company scholarships etc.).
• Key benefits such as share schemes, profit sharing, and retirement
counselling house purchase

22. EMPLOYEE OR FRINGE BENEFITS
Indirect forms of
remuneration
given in addition
to basic pay.

23. Importance of employee benefits
•Motivate and stimulate the interest of workers in
the job and make it more attractive and conducive
•Provide for actual or perceived needs
•Demonstrate that the company cares
•Provide a tax efficient method of remuneration
1/2/2023 Prof. Harriet Kidombo, University of Nairobi 23

24. Factors that influence employee benefits
External influences
• Government policies and
regulations
• Labour Unions
• Economic conditions
Internal influences
• Organizational strategies and
objectives
• Employee preferences and
demographics

25. Government policies and regulations
• These include wage controls on how much to pay employees at
maximum and minimum levels.
• If the government sets a maximum then employers use benefits to
compensate for the shortfall.
• Tax policies especially on incomes can be prohibitive for high income
earners hence employers would choose to give a lower pay and give
the rest through benefits.
• (could this be why executives have very many benefits?)

26. Labour Unions
• Unions negotiate for benefits for
their members through the
collective bargaining process.
• This normally include benefits
such as: health, transport or
housing.

27. Economic conditions-
• employers facing competitive pressure use benefits to either reduce
costs or attract and retain productive employees.

28. Organizational strategies and objectives-
• A large well-established employer in a mature growth industry may
offer generous benefits while a smaller, emerging firm in a young
industry may want to avoid or reduce fixed costs associated with
benefits. The strategy and objectives of an organization influences the
type and amount of benefits

29. Employee preferences and demographics-
• it is difficult to know what employees prefer if given a choice. Gender,
race, age and class influence the type of benefits given. For example
high income employees prefer non-cash benefits while low income
prefer cash.

30. Pension Schemes
• A pension scheme is an arrangement between employees and
employers that tasks the employer with making regular contributions
to a fund that takes care of payments made to the employee after
they retire.
• A pension plan is an employee benefit that commits the employer to
make regular contributions to a pool of money that is set aside in
order to fund payments made to eligible employees after they retire.

31. Types of pension plans

32. Pension
• Pension Fund pays a maximum of a third (1/3) of accumulated
benefits as a single lump sum and the remaining two thirds (2/3)
purchases a pension annuity which pays a guaranteed regular income
for life or a Provident Fund pays the accumulated amount in one
single lump sum.

33. Retirement Benefits Authority (RBA)
• Regulate and supervise the establishment and management of
retirement benefits schemes;
Protect the interests of members and sponsors of retirement benefits
sector;
Promote the development of the retirement benefits sector
Advise the Cabinet Secretary, National Treasury on the national policy
to be followed with regard to retirement benefits industry
Implement all government policies relating to the industry

34. RBA
• NO. 3 OF 1997 RETIREMENT BENEFITS ACT
• An Act of Parliament to establish a Retirement Benefits Authority for
the regulation, supervision and promotion of retirement benefits
schemes, the development of the retirement benefits sector and for
connected purposes

35. end