The Shift to Variable Pay

By Kevin on December 27, 2010 in career, employee engagement

For most of human existence, pay has been tied directly to output. We consumed only what we hunted successfully, later we bartered the crops we harvested and livestock we raised, and still later we would swap the skills we were good at for lodging or meals we needed. Even after the adoption of standardized currencies, we only received it for the goods we made or for specific services (e.g., shoeing a horse).

However, the Industrial Revolution and the nature of basic task work inside factories quickly broadened the practice of paying for time rather than performance. In the 1900s, a new army of white-collar office workers began receiving salaries based on annual estimates of time worked. This two-century long experiment in fixed-payment-for-fixed-time peaked in the 1930s. Then slowly but surely, more and more corporations began to introduce variable pay programs for at least part of their workforce. In the last 20 years the portion of compensation tied to variable pay has tripled from 4.2 percent in 1990 to 12 percent and we believe that variable pay will comprise fully 25% of compensation by the year 2030.

This dramatic shift to variable pay is an example of We principles at work. Employers benefit as it better enables them to manage base costs, reduce risks from unforeseen events, and reward employees whose efforts directly drive business outcomes. Workers benefit from variable pay programs because these can increase their compensation each year far beyond cost-of-living increases and better reward their individual efforts.

This post is an excerpt from the new book, We: How to Increase Performance and Profits Through Full Engagement, by Kevin Kruse and Rudy Karsan.

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