Hewitt: Variable-Pay Costs More Than Its Worth

May 5, 2004 (PLANSPONSOR.com) - When it comes to variable pay programs, for many companies the cost outweighs the benefits.

Four out of 10 (41%) companies with single-digit revenue growth said the cost of their variable pay programs – programs providing a performance-related award that must be re-earned each year and does not permanently increase base salary – outweighs the benefits. Similarly, a quarter of these organizations said their programs have not improved business results and 26% said they have actually led to adverse results, according to analysis conducted by human resources consulting and outsourcing firm Hewitt Associates.

Hewitt’s analysis shows that performance measures are the greatest downfall of companies’ variable pay programs. Specifically, only about half (56%) utilize revenue and share price as part of their variable pay performance measures, compared to 80% of high-growth organizations. Further, a quarter of companies focus variable pay measures on their ability to reduce costs, compared to none of the high-growth companies.

As for payouts, the majority of companies budget 30% less per eligible employee for variable compensation than high-growth companies, and most employees receive below-target payouts – 87% of target for single-digit growth companies, as opposed to 103% for high-growth companies. Additionally, high-growth organizations provide higher payouts to lower-paid employees – 123% of target – than to their higher-salaried employees – 100% of target – on average.

Hewitt analyzed its Variable Compensation Measurement (VCM) database of more than 100 companies to compare variable pay programs of single-digit growth companies to those of double-digit growth companies. This comparison is based on a five-year average growth in profitability.