July 8, 2010 — 26% of U.S. companies have already increased or plan to increase the proportion of variable pay in their employees' pay programs, according to research published by Hay Group. This compares to 12% of organizations globally that have decreased or plan to decrease the proportion of variable pay.

The shift also brings a renewed focus on performance, with 66% of U.S. companies (71% globally) reporting they already have changed or plan to change the performance metrics in their variable pay programs. About 40% of the organizations in the United States and 47% of companies globally have already increased or are planning to increase performance thresholds in plans, too.

The top driver for changing variable pay programs was to better align programs with the business strategy (61% globally, 69% United States). In the United States, other top drivers were to:

In response to increasing board pressure, 53% of U.S. companies reported already having made or planning to make changes to the evaluation process of their variable pay programs to better measure their effectiveness and return on investment. 48% of companies said their boards are more involved in making decisions around variable pay than they were two years ago.

"During this time of change it is important that organizations are fully aware of the consequences that raising performance thresholds can have on employee engagement," said WorldatWork member Tom McMullen, Hay Group's North American reward practice leader. "Many employees have picked up accountabilities from colleagues who have been downsized and have seen limited or no pay increases in the past two years. If the variable portion of their companies is now more difficult to earn, they may become further disengaged, just when companies most need them on board."

56% of companies are placing an increased emphasis on financial metrics (e.g., revenue or profit) in their variable pay programs. 21% of respondents reported planning to increase their emphasis on operational improvements (e.g., efficiency and productivity measures).

While 80% of U.S. companies agree that variable pay reinforces performance within the organization, only 55% believe that their variable pay programs are clearly understood by employees. Recognizing the disconnect, 53% of U.S. companies already have changed or plan to change the way they communicate variable pay programs to their employees.

"Variable pay programs can only work if they are understood by employees and managers," McMullen said. "More often than not, a simple straightforward program aligned with business priorities is much more effective than a sophisticated program that is difficult to understand. We see many organizations seeking to distill program communications down to easy-to-understand core messages."