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CHAPTER 3 Designing a Variable Pay Plan Objectives 3-1. Identify the steps to design or revise a variable pay plan. 3-2. Discuss pre-design activities that should be conducted and considerations that should be analyzed prior to designing a variable...

CHAPTER 3 Designing a Variable Pay Plan Objectives 3-1. Identify the steps to design or revise a variable pay plan. 3-2. Discuss pre-design activities that should be conducted and considerations that should be analyzed prior to designing a variable pay plan. 3-3. Explain the crucial elements of designing variable pay programs, including how to determine the plan objectives and plan type. 3-4. Determine considerations that must be taken into account when determining plan eligibility. 3-5. Discuss the different types of performance measures for variable pay and how to select them. Introduction A thoughtfully designed variable pay plan can align employee interests with organizational goals, fostering a culture of performance excellence. This chapter covers two of three phases of variable pay plan design: the pre-design, and the design phases. By following a systematic process, plan designers can ensure that critical issues are considered and addressed at early stages and that goals and measures will align to organizational strategies. 39 CHAPTER 2 Systematic Process for Creating a Variable Pay Plan Designing a variable pay plan requires careful thought and consideration to ensure its effectiveness in motivating employees, aligning with business goals, and promoting a positive work culture. This requires organizations to start with clear objectives that effectively balance multiple priorities, including alignment to business strategy, transparency and equity for employee participants, and flexibility to address changing business conditions. Following a clear process with multiple points for review along the way helps establish a clear business case and clear design elements that support the organization’s critical business strategies. Plan design is a systematic process for creating a variable pay plan. The process consists of three phases: pre-design, design, and funding and distribution (Figure 3-1). Plan design can be relatively simple or very complex, depending on the type of plan. Regardless of the level of complexity, the basis for plan design is generally consistent, allowing individuals and/or design teams to follow an orderly process for assembling the plan components. PHASE 1 Pre-Design PHASE Figure 3-1 2 Design Systemic Process for Creating a Variable Pay Plan PHASE 3 Funding and Distribution Pre-Design Considerations for Variable Pay Phase 1 of the process for designing a variable pay plan is pre-design. Pre-design activities that should be conducted and considerations that should be analyzed prior to designing a variable pay plan include considering internal and external factors, obtaining management support, and identifying the design team. Internal and external factors directly affect variable pay plans and should be considered in designing the plan. Chapter 1 discussed some of these factors (compensation philosophy, business strategy, business life cycle, business objectives). Additional internal factors include organizational readiness and culture, costs and resource availability, and timing. External factors include the labor market; competition; geopolitical, legal and regulatory issues; technology, and best practices (Table 3-1). 40  Internal Factors External Factors Organizational readiness/culture Labor market Costs/resource availability Competition Timing Geopolitical Table 3-1 Legal / regulatory Pre-design Technology considerations for variable pay Best practices Organizational Culture Organizational cultures can vary significantly, and the way an organization operates, its values, and its norms play a crucial role in determining how open and receptive employees and management may be to the adoption of a variable pay plan. Here are some common types of organizational cultures and how they may impact the acceptance and implementation of a variable pay plan. Traditional/Hierarchical Culture. In a traditional or hierarchical culture, decision-making is centralized, and there is a clear chain of command. Employees typically follow set procedures and guidelines. Such cultures may be less open to a variable pay plan as they often emphasize stability and uniformity. Adopting a new incentive program could be seen as a departure from the established norms, leading to resistance. In some cases, with more hierarchical organizations, employees’ ability to improve organizational performance may be limited. This culture may not be well-suited to a variable pay plan unless the objectives of the plan are primarily employee awareness of measures important to the organization. Innovative/Entrepreneurial Culture. Innovative cultures value creativity, risk-taking, and entrepreneurship. Employees are encouraged to experiment and find new solutions. An innovative culture may be more open to a variable pay plan as it aligns with the idea of rewarding individual and team contributions that drive positive outcomes. Variable pay can be seen as an incentive to spur innovation and reward those who take risks that lead to success. Individual/Employee-Focused Culture. In an individual-focused culture, the focus is on individual contributions, skills, and achievements. For organizations centered around individual contributors, the variable pay plan should emphasize and reward individual achievements and exceptional performance. This can be accomplished with clearly defined individual performance goals that support overall organizational performance. Collaborative/Team-Oriented Culture. In a collaborative culture, teamwork, cooperation, and shared goals are emphasized. Employees work together to achieve common objectives. For organizations with a collaborative ethos, the variable pay plan should emphasize team-based performance metrics and rewards. One consideration is to make sure any individual performance objectives align with team-based metrics to avoid unnecessary competition and prevent individuals from undermining collaboration. These four culture types can be plotted against the value that an organization places on individual versus team-based performance and based on comparing more traditional cultures versus more innovative and entrepreneurial cultures (Figure 3-2). 41 CHAPTER 3  Four Culture Types Traditional/ Integrative/ hierarchical team-focused Value organization Figure 3-2 places on its people Job-focused/ Individually Comparison of task-based measured culture types Employees’ ability to improve organizational performance Issues to Consider How can one tell if an organization is ready for a new or revised variable pay program? Some of the issues that should be considered in making that determination are listed below: Will the organization be committed (or continue to be committed) to variable pay as a part of total rewards? Can the organization measure the results on which rewards will be based? Is there an adequate level of employee trust? What is the employee perception of the market? How do employees view their organization compared to other organizations where they worked previously? How will variable pay affect other pay programs? Does the workforce have the skills and knowledge necessary to achieve desired results? Will the organization be willing to share information on the objectives and measures of the variable pay program, and progress toward them? Is the organization willing to accept the risk and uncertainty of a potentially wide variance in the possible payout? If applicable, how would the plan affect organized labor groups? Is the organization capable of accurately forecasting future performance on which rewards will be based? Cost issues to consider prior to the design process include implementation costs, funding, compliance and administrative costs. Implementation costs consider what the costs for communication and administration will be. Broadly estimating plan costs will provide an idea of what funding will be required. Adding or revising programs may result in costs to comply with various regulations. A consideration often ignored, forgotten, or miscalculated is the number of resources required to effectively implement and administer the program. Poor timing can ruin even the most well-designed variable pay plan. As compensation professionals consider the high-level objectives of their plan, they need to think about any recent, current, or upcoming events that may impact the appropriateness of implementing or revising the plan, such as these examples: CHAPTER 3 42  Rolling out a new commission plan the day after the airing of a national news story concerning the obsolescence of the organization’s product line. Distributing total rewards statements touting the competitiveness of the organization’s total rewards program soon after the announcement that no profit-sharing incentives will be paid for the year. Announcing a major enhancement to the organization’s management incentive plan, which will increase managers’ target incentive amounts considerably, just days after a major cost- cutting layoff is announced. Rolling out a new plan after the organization exceeded projected sales could be perceived as an attempt by management to unnecessarily reduce future rewards, especially if the changes are perceived as unattainable. ⊲ External Factors In addition to the internal factors previously covered and best practices, compensation professionals also need to consider a variety of external factors when designing a variable pay plan, including: Labor market. The need to keep pace with the marketplace in terms of competitive wages/ rewards and expectations of employees based on location and demographics. Competition. Consider what type of plans industry and international competitors are using. For example, if two large competitors in the same industry recently were in the news for large bonus payouts, think about how this might affect the organization’s intention to roll out a new bonus plan for managers. Geopolitical. War, terrorism, product tariffs, foreign trade agreements, and political relations in countries of business can all affect the selection and design of a variable pay plan. Technology. Technology elements such as self-service portals, administrative software platforms, and HR analytics packages can impact the complexity of plan design, funding, and distribution. Legal/regulatory. Consider the implications of wage and hour laws, government mandates, governing bodies, and tax laws on a variable pay plan. Obtaining Management Support Generally, compensation professionals will need some level of data and facts as they begin floating ideas within the organization. It is more efficient to begin at a high level (identify broad objectives, expected results, or rough financial costs or gains) and then develop the foundation of the plan as momentum increases and management support is obtained. Initially, it makes sense to collect only as much information as the decision makers in the organization require. There may only be one opportunity to pitch the idea, so it’s important to be able to focus the analysis to answer the level and detail of questions that are most likely to be asked. Establishing a partnership with finance early in the process is key for cost impact, goals, metrics and modeling results. They can also be key allies in pitching plan design ideas. 43 CHAPTER 3 There are those in positions of influence within an organization who will be more supportive of variable pay initiatives than others. These allies can be extremely helpful in gaining executive support for an idea and can serve as catalysts or champions for the cause. On the other hand, there are going to be individuals in any organization who, no matter what the change being proposed, will adamantly oppose the change. Compensation professionals need to be prepared to manage that opposition through building strong business cases to support proposed plans, sound analysis and financial modeling in partnership with finance, and management buy-in and support. Identify the Design Team The organization may hire a consultant or design the plan using in-house experts. If a more participative approach is desired, a plan design team may be formed. The pros and cons of using an in-house design team are outlined in Table 3-2. Pros of in-house team Cons of in-house team Tend to produce programs that have better alignment with an organization’s objectives, Expertise in plan design and implementation and they generally have more commitment may not exist internally. to implementation. Team members can be instrumental in Lack of strong management support for the building trust and buy-in for a new plan. team’s design proposal is a risk. Potential lack of creative thinking due to In-house teams can save substantial amounts concerns the design team members feel about of money otherwise paid to consultants. the task. Their familiarity with the culture may stifle out-of-the-box ideas. Individuals may have difficulty finding time to participate due to pressing job responsibilities. Pros and cons Table 3-2 of in-house design team To manage concerns, it may be helpful to develop a formal team charter that identifies the team’s purpose, objectives, authority, and interaction with other interested parties. The charter defines the process or roadmap to guide their actions in designing the plan. When the concerns of using an in-house team exceed the benefits, a hybrid approach can be used. As an alternative, an advisory group can be created to represent various perspectives of the organization, to provide reviews, and to support implementation. An advisory group is not involved in detailed design steps but rather reviews the plan at key junctures and discusses recommendations. This creates excitement in anticipation of the new program and provides feedback. The advisory group may be the final authority, or they may support the recommendation put forth to senior management. A cross-functional design team should consist of six to twelve members representing all organizational units affected by the plan and all levels of the organization. In a unionized work setting, the participation of union leadership or employees also should be addressed. Generally, effective teams will include: CHAPTER 3 44  Team leader (a respected business or operations manager) Finance representative First-line supervisors (2) Employee representatives (2) IT representative (ad hoc as needed) HR Consultant (if one is retained) Design The design of a variable pay plan is both a science and an art. The key is to have a reliable process and adjust it to the culture, objectives, and specific needs of the organization. The role of the design team includes four key tasks: plan design, plan approval, plan evaluation, and plan implementation. Plan design. Determine plan design, including defining eligibility and selecting performance measures. Plan approval. Obtain senior management approval for the initial concept and final plan design. Plan evaluation. Determine how the plan will be evaluated. Plan implementation. Participate in the implementation of the plan. The design process addresses essential components of variable pay programs. This general approach is typical for a short-term incentive plan design but can be easily adapted and tailored for other variable pay plan types. Typically, plan design will include the following nine steps. 1. Determine the business objectives it will support, variable plan type, and plan objectives. 2. Define eligibility. 3. Establish/apply competitive pay/recognition levels, mix, and leverage (for incentives). 4. Select performance measures. 5. Set performance targets/goals and payouts (expectations, performance standards, and/or range, baselines/thresholds/targets/maximums, etc.). 6. Set payout levels. 7. Determine plan funding (including modeling and accounting). 8. Establish payout means (form, frequency, and timing of payouts). 9. Gain final plan approval. Once plans are designed, they are communicated, implemented, administered, evaluated, and modified in an ongoing cycle to meet organizational needs, all of which are covered in a later chapter. 45 CHAPTER 3 Determining Plan Objectives and Plan Types As mentioned in Chapter 1, variable pay supports the business objectives driven by a business strategy to ensure the plan remains focused and clearly articulates the business objectives it will support or reinforce. It’s important to limit the number of plan objectives. Generally, three or fewer and no more than five plan objectives should be defined for any one group of participants. Plans that are simple and easy to understand are more apt to drive desired behaviors. Select appropriate variable pay type(s)—such as short-term or long-term incentives, bonuses, or recognition rewards—that are best suited to achieve the specific business objectives identified in the plan. Remember that pay mix is a component of the compensation philosophy. Consider what type of variable pay best suits the organization’s needs, whether the desired objectives are achievable in a year or less (short-term) or more than one year (long-term), and if the type of plan chosen best supports the plan objectives. Here are a few examples of plan objectives that align with an appropriate type of variable pay: Improve the productivity of the manufacturing division by implementing an incentive plan that will share realized cost savings with plan participants. Drive higher levels of overall customer satisfaction through the introduction of a spot recognition plan for call center employees. Ensure the timely rollout of a critical new product by offering current research and development employees assigned to the product milestone bonuses at critical times. Focus all employees on increasing operating income by implementing a profit-sharing plan. Defining Eligibility There are four key factors to consider when determining plan eligibility: Level at which performance is measured: The level of measurement should support the plan objectives and will be a key factor in determining whom to include in the plan. Participant line of sight: Can participants influence results? Nonparticipants: Who will not be considered eligible? Individual criteria: What individual criteria, such as employee status, performance rating, or eligibility in other plans, will affect the pool of eligible employees? ⊲ Level at Which Performance is Measured Performance can be measured at various levels, including organization-wide or by organizational unit, team, or individual. Organization-wide. Plans at this level measure and reward performance at the most encompassing organizational level. The most common organization-wide short-term plan is a profit-sharing plan. Long-term organization-wide plans tend to operate independently of other variable pay plans (e.g., stock option plans). CHAPTER 3 46  Organizational unit. An organizational unit may be defined as a unit that appears on the organization chart. Plans at this level typically are short-term and focus on a variety of workgroups, such as strategic business units (SBUs), departments, divisions, or locations (sites). Team. A team is a small number of people with complementary skills who are committed to a common purpose. Often, they share performance goals and hold themselves mutually accountable. Types of teams include temporary, permanent, full-time, or part-time. Plans for teams tend to operate independently, recognizing the occurrence of an event, milestone, project completion, or outstanding contribution. Individual. Individual contributions within plans exist in most organizations. They provide individuals with more direct control/accountability for their variable pay. ⊲ Participant Line of Sight Line of sight: Line of sight is the employee’s perception of the degree to which Employee's perception of the degree to which contributions individual contributions influence the performance measures influence improvement. being evaluated. Depending on how close the measures are to the influence of the employee, line of sight can be short or long. Short line of sight: Characteristics of a plan with a short line of sight include: A smaller number of plan participants (individual, work group, department, plant/location) Well-understood measures (scrap rate, productivity, turnaround time) More direct ability to affect the measure Short reporting periods (weekly, monthly, quarterly) Long line of sight: Characteristics of a plan with a long line of sight include: A greater number of plan participants (organization-wide, large business unit) Measures that may be difficult to understand (profit, economic value added, EBITDA) Long reporting periods (yearly) Long y rac ater ccu e Gr ent A re m as u Me Figure 3-3 Line of Sight Participant line of sight ter t rol e a on G r ee C loy E mp Short Individual Team or Organization Organization- Workgroup Unit wide Level at Which Performance is Measured 47 CHAPTER 3 Figure 3-3 illustrates several relationships, including the relationship between: The level at which performance is measured The degree to which employees have confidence they can influence and contribute to the result The degree to which management has confidence the measure will accurately reflect performance The shorter the line of sight and the lower the organization level, the more familiar employees are with the measurements and the more confidence they have in them. The longer the line of sight from the employee and the higher the organization level, the more likely management is confident these metrics are more accurate and more legitimate. The challenge in variable pay plan design is to reconcile management’s acceptance of performance measures with the employees’ confidence in their ability to influence the measures. ⊲ Nonparticipants If there are employees not included in the plan who have a direct role in the attainment of the plan objectives, participants may be impacted if actions by nonparticipants reduce or eliminate payouts. On the other hand, nonparticipants also may be less engaged and feel the plan is unbalanced if they are not allowed to share in the results. Three things to consider when determining nonparticipants in a variable pay plan are: the level of trust, payouts for expected behavior, and unintentional plan exclusions. Level of trust. Is the trust level among all employees high enough to implement a plan for only certain groups without the disengagement of nonparticipants? Payouts for expected behavior. Will some groups receive variable pay for behaviors that are normal expectations for other groups? For example, a perfect attendance bonus for key operational groups during the holidays. Unintentional plan exclusions. Will criteria for an organization-wide plan exclude many or most employees from an opportunity to receive an award? For example, a recognition plan that pays out $5,000 for any employee whose direct efforts save the organization more than $50,000 annually. In practice, only managers and above can make decisions that would result in that level of savings. ⊲ Individual Criteria When determining whether individual employees will be eligible for the plan, consider the following criteria: Employment status. Full-time versus part-time. Changes. Status changes such as promotions/transfers into or out of eligible position, team, or department. Departures. Voluntary versus involuntary departures such as retirement, layoffs, or termination after the end of the performance period but before the payout occurs. CHAPTER 3 48  Interruptions. Interruption in employment such as medical or personal leave of absence, long- term disability, or military leave. Organization level. By job title, job grade, or other organizational hierarchy. (Note: This criterion may not account for the individual’s impact on organizational performance and may put pressure on the job evaluation system.) Performance rating. Poor performers or employees on probation or final notice. Eligibility for other plans. Double payouts, competing plans, sales plans. Global, expatriate, and union employees. Initial plan eligibility: Are employees eligible upon the first day of employment, after successful completion of a probationary period, or at the beginning of the next measurement cycle? Selecting Performance Measures As discussed in the first section of this chapter, a variable pay plan’s objectives should align with an organization’s business objectives, which are driven by business strategy. These objectives will guide the plan’s performance metrics (Figure 3-4). Business Objectives Figure 3-4 Drives Guide Business Plan Strategy Performance Selecting Performance Plan Measures Objectives Align ⊲ Establish Performance Measurements It is important to decide what will work best in measuring a plan’s performance. In selecting performance measures for a new plan, one should consider financial and non-financial measures and how performance is currently measured for other programs in the organization. There are several business performance measurement systems that can help employees stay focused on performance objectives that support business success. These systems provide a framework for setting goals, tracking progress, and aligning individual and team efforts with the organization's strategic objectives. Types of measurements include: Balanced scorecard. focuses on financials (shareholders), customers, internal processes, plus innovation and learning Key performance indicator (KPI). A quantifiable measure Key performance indicator (KPI): that organizations use to evaluate effectiveness and A quantifiable measure that organizations use to evaluate progress toward achieving important performance effectiveness and progress objectives. KPIs are used by organizations at various levels towards achieving important (e.g., overall business, business unit, department, employee). performance objectives. KPIs are specific, measurable metrics that track critical aspects of business performance. They can be financial (e.g., revenue, profit margin), operational (e.g., production efficiency, customer satisfaction), or related to employee performance (e.g., sales targets, customer retention rate). KPIs help employees understand their impact on the organization and focus on achieving key results. 49 CHAPTER 3  Management by objectives (MBO). MBO is a goal-setting and performance management system where employees work with their managers to set specific, measurable objectives aligned with organizational goals. This approach fosters a clear understanding of individual responsibilities and keeps employees focused on what matters most for the organization. Objectives and key results (OKRs). OKRs are a goal-setting framework. They define ambitious objectives and key results that outline measurable outcomes to achieve those objectives. OKRs create alignment and focus throughout the organization, helping employees understand their role in driving business success. Activity-based metrics. Activity-based metrics track the Management by objectives (MBO): volume and efficiency of specific activities that contribute A goal-setting and performance to business success. For example, in a sales environment, management system where specific, it could be the number of sales calls made or customer measurable objectives are set to interactions completed. These metrics help employees align with organizational goals. concentrate on the actions that lead to desired outcomes. Competitive benchmarking. This type of measurement Objectives and Key Results (OKRs): involves taking a largely external perspective, often A goal setting framework. comparing performance with that of competitors or other best practitioners of business processes. Multiple, seemingly conflicting measurement frameworks and methodologies exist because they all add value. They provide unique perspectives on performance and offer managers a different set of perspectives by which to assess the performance of individuals, teams, and organizations. Under some circumstances, one perspective will be exactly right for an organization, whereas in other circumstances, it would be counterproductive. The key is to recognize that there is no single best way to view business performance. ⊲ Types of Measurements Quantitative Measures: Measures that lend themselves to Quantitative measures lend themselves to precise definition precise definition and assessment. and assessment (e.g., counting the number of manufactured parts that meet specifications). With quantitative measures, there usually is less room for variability in the data. Examples include financial measures and operational measures (Table 3-3). Financial Operational Day-to-day data: This may provide better data for making day-to-day improvements in operations that could lead to Volume/profit: Usually comprises some improvements in monthly or quarterly sales volume. Examples variation of volume or profit. include calls taken, net promoter scores, the accuracy of orders, efficiency of delivery, or customer satisfaction. Aggregate/end-result level: Often are most useful Measure effectiveness: Can be used to determine at the aggregate, end-result level. effectiveness across multiple functions or processes. Limited interim process feedback: This may not be as Identify key processes: Begin with the organization’s effective as operational measures in providing interim customers and work backward into the organization to identify process feedback needed for improvement. the key processes or workflows and associated measures. Reflect value to customer: Often transcend organizational boundaries and reflect the extent to which the entire, end-to-end process adds value to the customer. Table 3-3 Types of quantitative measures CHAPTER 3 50  Qualitative measures require a greater degree of judgment. They are useful when evaluating certain behaviors and results that require assessment based on observation and perception. Qualitative measures do not have the same definitive and objective characteristics as quantitative measures. They are typically behaviorally focused measures, with behaviors referring to the ongoing activities in which participants engage to produce results. These measures have an emphasis on workflows, values, and individual/group behavior. Examples include: Anchored rating scale: This measurement defines as Quantitative measures: Measures precisely as possible the characteristics of different levels that lend themselves to precise of performance. definition and assessment. Judgment: This measurement is the expression of an opinion or perception, usually in a holistic or global fashion, without significant detail or rationale required. The reliability of qualitative measures can be increased by seeking input from multiple sources. As an example, employees can gather 360-degree feedback from managers, peers, and other team members to create a holistic view of their performance and impact. ⊲ Single vs. Multiple Measures Single-measure plans, as their name implies, are based on a single measure of performance. The most commonly used measure in a single measure plan is either financial-based or productivity-based. A financial-based plan relies on a financial measure, such as Single measure plan: profit. A similar profit measure may be used at the business Incentive plans based on a single unit or group level. For example, a production department measure of performance. measured on profit (sales of department less labor, materials, and/or overhead costs). A productivity-based plan is one designed to improve productivity and share a portion of the gains with employees as a group. Primarily used in manufacturing, productivity-based plans have become less prevalent as the modern marketplace requires a more balanced measurement for performance improvement. For example, a production department measured on yield per ton of steel, labor cost, or percentage of defects. Multiple-measure plans are incentive plans designed to Multiple measure plan: measure and reward performance using one or more goals. Incentive plan designed to measure and reward performance The plan may reflect several ways to measure performance using one or more goals. against a single objective or several objectives. A financial- based measure typically accounts for at least one of the measures and provides funding for the plan. Best practice is that such plans should be limited to four or fewer measures. Plans may reflect several ways to measure performance against a single objective. Multiple financial objectives could be used, 51 CHAPTER 3 such as profit, revenues, return on sales, cash flow, or debt ratios, or plans may measure several objectives with a distinct measure for each. In the example of a multiple-measure plan in Figure 3-5, the award amount is based on profit, productivity, and customer satisfaction rating. Weighting Minimum Target Max 1. Profit 25% 40M 44M 48M 2. Productivity 50% 70 units/labor hour 75 units 80 units 3. Customer Satisfaction 25% 72% 74% 78% Rating Incentive Earnings 0% 7% 14% of Base of Base of Base Example of multiple Figure 3-5 measure plan ⊲ Weighting Payout by Measure In multiple-measure plans, different weighting can also be given to each measure. Weighting should be based on business importance or financial value, as shown in Figure 3-6, where the payout at target is 10% of pay. Example: Payout at target = 10% of pay Objective Measure Weighting Payout Financial Profit 25% 2.50% Business Process Productivity 50% 5% Customer Customer Satisfaction 25% 2.50% 100% 10% Example of Figure 3-6 weight measures Weighting also can vary by organizational level. Adjusting the weight of goals by organizational level can be an effective way to address line of sight differences while still using the same measures for all, as shown in the example in Figure 3-7. CHAPTER 3 52  Example: Level Corporate Measure Division Measure Executive 80% 20% Manager 60% 40% Supervisor 40% 60% Employee 20% 80% Example of weighting by Figure 3-7 organizational level Unforeseen circumstances and events, both internal and external, can and will impact business strategy. That will, in turn, impact goals and measurement. Compensation professionals need to be prepared to respond to changes in business strategy and objectives—and possibly add, delete, or modify objectives and goals in variable pay plans—during crisis situations like a pandemic, war, sudden organizational change, or natural disaster. Then, decisions must be made related to how these changes will require (or not) adaptation of the variable pay plans in place. 53 CHAPTER 3 Recap A systematic process for creating a variable pay plan includes three phases: pre-design, design, and funding and distribution. Pre-design considerations include many internal and external factors, such as timing, organizational readiness, and best practices, as well as obtaining management support and identifying the design team. Variable pay plan design should follow a nine-step process, starting with creating plan objectives. Those objectives will lead to choosing a type of plan, defining eligibility, establishing the mix, selecting performance measures, targets, payout levels, establishing funding, payout means, and gaining final plan approval. Plan eligibility should consider the level at which performance is measured, participant line of sight, nonparticipants, and individual criteria. There are multiple types of performance measures and types of measurements. No one approach will work for all organizations. References “Incentive Pay Practices: Publicly Traded Companies”. July 2021, WorldatWork. CHAPTER 3 54