APU Business Original

The Advantages of Using Variable Pay Models in 2022

By Dr. Gary L. Deel, Ph.D., J.D.
Associate Professor, Dr. Wallace E. Boston School of Business

In a previous article, I wrote about how fixed pay is the traditional standard for employee compensation. In times of economic hardship, the fixed pay model tends to be the most appealing to workers. However, the other type of pay model – variable pay – can also be a powerful way to motivate employees above and beyond the incentives of fixed pay.

Base Pay Does Not Always Motivate Employees to Perform at Their Best

Variable pay incentives are often combined with fixed pay to create optimal compensation packages for employees. In these combined models, the fixed portion is often referred to as “base pay.”

Base pay is enough to motivate employees to show up for work, be on time and work just hard enough to avoid being fired. But that’s where it stops. When employee pay is of an exclusively fixed type, there is no connection between employer performance and employee performance.

In other words, employees don’t have a reason to care whether the company they work for does well or not. As long as the employer stays in business, the same fixed pay will continue to be issued week after week. What is missing is “skin in the game” for the individual employee, and that is where variable pay models really shine.

Related link: How to Make Strategic Decisions about Employee Pay

How the Variable Pay Model Can Be Adapted to Incentivize Employees

However, variable pay designs need to be very carefully thought out. If the incentives are not thoughtfully aligned so that employees are encouraged to work together and help one another, there may be “alignment problems.” Personal interests can result in the type of competition between employees that cannibalizes company goals and objectives.

For example, if one group of employees in an organization is responsible for quality of products sold and another group is responsible for minimizing production costs, these two groups might have opposing prerogatives. Similarly, if one department oversees increasing sales volume while another department is responsible for maximizing sales price, these two employee missions might ultimately be at odds with one another to a certain extent. These competing priorities are why thoughtful planning is so important.

Related link: Pay Equity and Private-Sector Employee Accountability

An Example of How Variable Pay Can Be Successfully Used

Years ago, I was the Head of Operations for Madame Tussaud’s Interactive Wax Museum Las Vegas. When I was in that role, several departments reported to me. Those employees included our street solicitation team, box office staff, retail store clerks, custodians, maintenance technicians and wax sculpture artists.

There were approximately 100 employees throughout the site. And when I came into the role, almost everyone was paid exclusively on fixed pay. It was an hourly wage that was guaranteed to each employee who clocked in, regardless of how much effort they put into their roles or how productive they were.

Performance at Madame Tussaud’s was measured by the corporate parent company in a number of different ways, including:

  • Volume – The number of visitors who entered Madame Tussaud’s in a day
  • Gate – The average ticket price paid by visitors to enter the museum
  • Ancillary Spend – The average amount of money spent by visitors on things other than the initial ticket, such as food, beverages and souvenirs
  • Total Spend Per Head – The combined average of gate and ancillary spend per visitor
  • Quality Scores – Determined by visitor experience survey feedback

At the time I joined Madame Tussaud’s, employee performance was suffering, so I needed to come up with an idea to turn things around. After studying the problem for the first few months of my job, I decided to implement a variable pay model.

I wanted to incentivize employees to do their best work. To achieve this goal, I deployed a commission incentive in each of the departments that helped to motivate them to meet their daily goals:

  • The street solicitation team was aimed at driving customers to the museum, so they were responsible for handing out admission coupons on the Las Vegas strip and steering potential visitors toward the museum’s box office.
  • The box office team was tasked with optimizing gate prices.
  • The retail team was asked to drive ancillary spends through sodas, popcorn, photos, T-shirts, keychains and other related products.
  • The custodian, maintenance and wax figure creation teams didn’t really have any quantitative goals, but their efforts were measured by the overall quality of the attraction and the extent to which visitors enjoyed the experience. These metrics could be directly measured through guest experience surveys. But moreover, people will come and spend money at a clean, well-maintained attraction, so the work from these departments also indirectly influenced the other departments as well.

But there were some potential alignment problems in the variable pay options available to me. For example, if the street solicitation team was paid a commission based only on how many people visited the attraction, they would be incentivized to discount tickets as heavily as possible in order to increase volume. As a result, the discounted tickets would work against the box office team’s goal to maximize the gate.

The reverse was also true. If the box office team focused too much energy on maximizing gate, that would negatively affect volume. Consequently, the street solicitation team’s commissions would be hurt.

Then there was the retail team. Since they were “downstream” in the guest experience from the box office team, what incentive would there be for the latter to help promote the former?

Another consideration was the custodial, maintenance and wax artist staff. Beyond keeping the attraction running, why would they care whether or not the other teams met their goals? I needed everyone to care about the success of their coworkers, so the inclusion of a component that required mutual cooperation was necessary.

Here’s what we did. We developed a commission pay program that was worth a percentage of employees’ salaries. It was split into two parts:

  1. Individual Department Commission – Each department had its own individual incentives, based on the metrics that they could control. For example, the street solicitation team was paid a commission if they hit their volume numbers, the box office team was paid a commission if they hit their gate numbers, and so on. This individual incentive was worth a small portion of the total commission if those goals were met.
  2. Total Attraction Commission – The other piece of the commission plan, which constituted the majority of the possible payout, was payable if – and only if – all departments met their goals on a given day. So the lion’s share of commissions was paid only if employees throughout the museum worked together to help each other succeed.

This commission plan made for some complicated accounting and payroll processing. However, it turned out to be very effective at promoting individual department performance and team performance as a whole.

Employees saw the value in doing their best work, but they also recognized that there was nothing to be gained by competing with each other. Instead, they saw that by working together, they could achieve more than they ever could alone. This lesson in synergy paid significant dividends while the plan was in effect.

Ultimately, variable pay programs can be a powerful tool in motivating employee performance. But as with most things, proper planning and thoughtful design is critical to the success of these kinds of initiatives.

Gary Deel

Dr. Gary Deel is a faculty member with the Dr. Wallace E. Boston School of Business. He holds an M.S. in Space Studies, an M.A. in Psychology, an M.Ed. in Higher Education Leadership, an M.A. in Criminal Justice, a J.D. in Law, and a Ph.D. in Hospitality/Business Management. Gary teaches classes in various subjects for the University, the University of Central Florida, the University of Florida, Colorado State University, and others.

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