Why Employers Offer Variable Pay to Retain Employees

Happy female employees at work in office setting

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Variable pay is additional compensation that an employee gets because of their performance. It might come in the form of a bonus or sales commission. It can be used to recognize and reward employee contributions towards company profitability, productivity, or some other metric deemed important by senior leaders. This performance-based payment is common in sales.

Key Takeaways

  • Benefits make up about a third of the average worker's total compensation.
  • Employers should make sure employees know what benefits are available to them.
  • Companies should communicate expectations clearly so workers know how they can earn a raise or bonus.

Variable Pay

Variable pay can be used to excite and retain employees. They want the opportunity to earn variable compensation to bolster their base salary. And today's employees are also looking for more than just a base salary and benefits package when they decide to come on board and work for an employer.

It is no longer enough for a company, even a global company, to offer the same generic benefits to every person they hire. Employees now expect comprehensive benefits packages that are tailored to their own personal circumstances, not just broadly defined demographic needs.

Personalizing benefits packages starts with employers truly understanding what their employees most want because benefits are only as valuable as each employee views them. The greater the flexibility and variety of the benefits program, the more likely your employees are to feel appreciated. For instance, a young employee with no children might see no value in a life insurance benefit but would appreciate an extra day or two in paid time off.

Employer Costs in Pay and Variable Pay

According to the Bureau of Labor Statistics, a civilian worker's average salary was $28.16 per hour
in March 2022, and benefits cost employers an additional $12.74 per hour and accounted for 31.2 percent of employee compensation. The average employee also made $.93 per hour in supplemental pay. Supplemental pay includes employer costs for employee overtime and premium pay, shift differentials, and nonproduction bonuses.

Nonproduction bonuses are given at the discretion of the employer and are not tied to a production formula. Common nonproduction bonuses include end-of-year and holiday bonuses, referral bonuses, and cash profit sharing. 

Explaining Employee Benefits

Employers must present employees with both the intrinsic and extrinsic value of the benefits they offer in an easy-to-read and understandable format. Conveying benefits packages in layman’s terms is not an easy task. Efficiently relaying this information is a critical task.

From health insurance to retirement plans to variable compensation, one company may offer many types of benefits for employees. Some of these benefits can confuse employees. For example, employees might not know how much to contribute to a 401(k) or if their health insurance premium deductible is reasonable.

If your employees are allowed to choose from different benefit plans, make sure your system gives employees access to a resource that can answer questions about which plan makes the most sense for them or their families.

Offer Benefits Consistently

Employers need to be very clear about how an employee can earn more money. If the employer communicates particular goals, levels of productivity required, or quality standards to achieve a bonus or other form of variable compensation, it is critical that every employee who achieves the goal receives the reward.

That's why it makes sense for employers to openly share information about the cost of benefits. The typical employee has no idea how much their compensation increases because of the value of their benefits.

If an employer is clear about how much the company is investing to make its employees happier and healthier, their employees will have more appreciation for the benefits offered.

Adding Benefits

When new benefits are added, HR departments will need to have an open line of communication with employees to make sure they understand the benefits.

Companies should also consistently survey their employees to understand if their benefits are satisfactory. If a company realizes that a particular benefit isn’t working or isn’t valuable to employees, they should consider cutting back, replacing, or changing a benefit.

Great Benefits Help Employees

It is impossible to develop one single benefits solution that will take care of every employee, especially if you consider the diversity of needs your employees might have. Your employees also need to understand the value of the personalized benefit program that your company offers.

Frequently Asked Questions

How does pay affect employee retention?

Although every workplace is different, higher pay makes it more likely for an employee to stay in their job. Higher base pay tends to increase the odds of an employee staying with their current organization the next time they move into a new role.

What are two reasons why companies offer employee benefits?

It's easier to find, hire, and retain high-quality workers when you offer employee benefits. In addition, you may end up with a healthier and more productive workforce.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Bureau of Labor Statistics. "Employer Costs for Employee Compensation Summary."

  2. Harvard Business Review. "Why Do Employees Stay? A Clear Career Path and Good Pay, for Starters."

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