Individual employees

Advantages and disadvantages of variable pay

Advantages:
Talent management: Variable pay helps retain high-performing goal-driven staff, as employees
that feel they are well compensated are less likely to leave. It also differentiates reward for those
employees who contribute more.
Economic:
Aids in balancing out the salaries of employees. It is an element of
remuneration that is self-funded and acts as a pressure valve. It also links
pay with the fortunes of the business.
Motivation: Variable pay related to performance increases productivity and
motivation. It helps focus attention on
specific areas of performance and results and reinforce and modify employee behavior.
Talent attraction: Variable pay makes an employer competitive.
Inclusion: This type of pay helps give a clearer identity to each department and team and
enhances team membership for individuals. It also fosters more cooperation and a sense of
shared identity.
Competition: It meets competitive market norms, practices, and customs and also helps
organizations avoid unduly high fixed basic salaries.
Disadvantages:
Perception
 of unfairness: If the proper payment structure is not in place, it can cause the
perception of unfairness and create jealousy within the organization.
Cost: It can be costly for an organization if not implemented correctly.
Recency bias: Variable pay can be susceptible to recency bias. As performance
appraisals form part of a big part of variable payout, managers sometimes tend to rate
an employee on their most recent job performance instead of how they performed the
entire year. As a result, it rewards input and effort and not the result.
Competition: Difficulty can arise in the form of unhealthy competition, making it
difficult to foster collaborative teams.