How Do I Create a Performance-Based Variable Pay Policy and Handle Early Exits?

I want to draft a policy on performance-based variable pay in my company. Could someone please send me a draft policy if you have one available? Also, what should be the protocol if employees leave the organization before the variable pay results are declared?

Thank you.

I have a few queries to ask you first. Do you have a proper performance management system in place? A robust one? If you can share with me your current system, policies, rating, and linkage with rewards, I will be able to give you good professional advice.

Industry Experience
I have over 52 years of industry experience, including 33 years with Larsen and Toubro. You can check out my profile on LinkedIn, our website, etc. Awaiting to hear from you and with best wishes.

Variable Pay and Organizational Performance

Variable pay is usually based on both organizational performance and individual performance. If some individuals are performing well but the overall organization is suffering, the purpose of variable pay is lost. Conversely, if the organization is doing well but some individuals are not performing well, then everyone should not be treated equally.

Structure of Variable Pay

A simple variable pay structure may involve a certain percentage of the target (CTC or monthly gross) for different levels and individuals, declared at the beginning of the year based on achieving targeted PBI and individual performance (considering a proper PMS is in the system). Approximately 60% to 70% may be based on business results and 30% to 40% on individual performance. A flexible scale could be implemented where exceeding the PBI target by a maximum of 15% to 20% would increase the payout accordingly. Conversely, falling below 80% to 85% of the target would result in a decreased payout.

Individual Performance Considerations

Regarding individual performance, outstanding performance may receive an extra 15% to 20%, good performance 5% to 10% extra, successful performance 100% of the target, and needs improvement falling below the target at 80% to 85% or nil.

Eligibility for Variable Pay

Only employees who are on the organization's payroll on the date of variable pay disbursement will be eligible for the payment. This practice can help to some extent in controlling the attrition rate.

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