Understand How to Calculate Variable Compensation

Understand How to Calculate Variable Compensation
Understand How to Calculate Variable Compensation

Variable compensation is a competitive advantage in retaining talent. This article will show you what it is and how to calculate this remuneration in your company.

Therefore, every organization seeking to achieve business results knows that this success is directly related to attracting and retaining talent. After all, every company is made up of people responsible for performing the organization’s goals.

The challenges are diverse in the search for the best talent. But they are even more significant in retaining these talents. The human resources sector must offer competitive advantages, which place your company in the search for candidates. In itself, this is one of the biggest challenges.

Actions aimed at employer branding are sensitive and need to be innovative and, at the same time, follow the market’s offerings. However, they also need to align with their employee profile and their organization’s culture.

Therefore, the company must have a good development plan and good benefits management, which meet the needs of its employees and promote a climate of satisfaction. But it needs to be aware of the advantages that the market offers and expand the possibilities of promoting the attraction and retention of its talents.

Among the advantages, large companies offer, one of them stands out for being very competitive in the market and awakening the team’s commitment to the organization’s results. In addition, it is variable remuneration, an excellent alternative to promote engagement and increase the productivity of its employees.

Do you want to understand what it is about and how to implement and calculate variable remuneration in your company? Then, follow us on this article!

What is variable compensation?

Among the pillars of people, management is actions that aim to recognize and value employees. In this sense, variable remuneration would be the reward for delivering results and achieving the goals set by the organization.

Variable remuneration is like an award that can be linked to performance evaluation. It seeks to reward the high performance of its employees and thereby promote engagement in the organization’s objectives.

It can apply in the form of bonuses, commissions, profit-sharing, or in other ways that your company deems relevant to promoting an environment of employee motivation.

And what are the advantages?

We are talking about a payment that goes beyond your employee’s contractual salary. Therefore, you may wonder what the benefit, for the organization, of this extra payment.

As a result, as we indicated at the start of this essay, variable compensation is a competitive advantage in attracting and retaining talent. Therefore, it enhances the employee experience and employer brand.

Mainly about promoting a better employee experience within the organization. After all, variable remuneration promotes a culture of meritocracy, as it applies proportionally to the delivery of results for each employee.

Therefore, the employee with the highest performance receives a higher bonus than the lowest commission.

This is done transparently, favoring clear communication and a bond of trust between the organization and employees.

The rules for applying variable remuneration must be clear and linked to a goals or performance evaluation contract. Finally, and most importantly, the entire application process is known to all employees.

In short, fostering a culture of valuing its employees through variable remuneration becomes a factor in strengthening the employer brand and attracting talent to your company.

How to set up a variable compensation plan?

The first step to implement a variable compensation plan in your company is based on the definition of indicators, the so-called KPI’s. They will guide the evaluation and control of the performance of each employee. These indicators must be directly linked to the expected performance and must be clear so that your employees understand what is being measured.

Thus, speaking of clarity, it is necessary to define the criteria for applying the variable remuneration, which need
of wide dissemination.

Furthermore, it is essential to determine the minimum and maximum amounts of the bonus and the eligibility criteria for employees. In addition, you need to calculate the ROI and measure the potential return on investment.

Having established indicators and defined criteria, it is necessary to monitor the performance of the employees, team, or area of ​​the company that will participate in the plan.

It is necessary to keep periodic reports of the indicators evaluated and keep the progress of the goals available to everyone involved. This will make them responsible for achieving all the proposed objectives.

How to calculate this remuneration?

Variable Compensation

In summary, the calculation of variable remuneration needs to have a method that minimizes bonus errors as much as possible. In this sense, for small or large companies, the ideal is to use specialized software.

Therefore, for system parameterization purposes, the variable remuneration calculation will depend on the type of remuneration chosen by your company. For example, if your company chose profit sharing (PPR) as the variable compensation model; you must calculate according to the performance of each employee. Therefore, if your employee managed to achieve all the goals stipulated in the period; he will have 100% of the amount specified by the company.

This is a division model that we call target value since it has an expected value and depends on reaching the goals set by the company.

Another variable remuneration model is the PLR ​​or company profit sharing. This bonus model and must include all employees. However, it is possible to establish different weights in its application; thus allowing more strategic positions to receive greater participation than operational positions.

On the other hand, this variable remuneration model is called distribution; since the company will divide the net balance achieved in that period. The best way to ensure the correct calculation of your variable compensation, applying all the rules, is to automate the process through HR software.

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