Rewarding performance: the role of variable pay

The cost conscious business environment of the early 1990s has caused organizations to review the methods by which they pay their people. This harsh economic reality has created a climate where it is difficult to balance cost efficiencies with the need to motivate employees to increased performance. Traditional merit pay systems simply do not allow for sufficient differentiation of financial rewards between good and poor performance. Progressive organizations are seeking out alternative pay methods to both maintain cost controls and increase employee performance. Variable pay forperformance, a method of paying employees above and beyond base pay for successful attainment of specific performance objectives, is one possible alternative. Variable pay design can include incentives for achievement based oncompany performance, group performance, and/or individual performance. The purpose of this research is to study the uses and effectiveness of variable pay as a viable alternative to traditional merit pay systems in increasing employee performance.