Spending on Variable Pay

We know that publicly-held companies have increased their spend on variable pay plans. In 2019, variable pay as a percent of total payroll was around 14%, excluding sales personnel, while merit budgets have been stagnant at 3% for over two (2) decades. Given that shift in pay, are privately-held companies following suit?

WorldatWork and Vivient Consulting conducted a survey of 215, private for-profit companies, and found that similar to publicly-held companies, they also continue to emphasize short-term, cash-based incentives to motivate employees. Companies in the survey increased their spending in 2018 and expected to do the same going forward.

Survey Findings

Notable findings from their most recent survey include:

• Spending on STIs increased to 6% of operating profit at median, from 5% in prior years. This indicates that private companies are spending more on STIs to motivate employees and compete for talent. In addition, family-owned companies spend 10% at median on STIs to help attract talent, while private equity-owned companies spend 5.5% at median.
  

• The prevalence of exempt, salaried employees and non-exempt (salaried or hourly) included in annual incentive plans continues to increase. The biggest jump occurred for non-exempt employees. Approximately two-thirds of non-exempt employees are eligible for annual incentives.

• Companies have set threshold, target and maximum awards for participants in annual incentive plans, indicating increased formalization of plan design parameters.
  

• Private companies continue to focus on profitability rather than revenue growth as performance measures in cash-based short- and long-term incentive plans.
  

Variable Pay Plans

The most prevalent variable pay plan is the Annual or Short-term Incentive (STI) Plan. Given that executives are typically eligible for STI plans, what’s of interest is the extension of incentive participation more broadly to exempt and non-exempt employees.

The survey indicated 82% of exempt employees are eligible for participation in an STI plan and 66% of non-exempt employees are eligible too. The median target awards as a percent of salary was around 10% for exempt salaried and 5% for non-exempt salaried. The target award typically has a minimum or threshold as well as the maximum award level stated. The most typical threshold was 50% of the target award, while the most typical maximum payout level ranged from 150% to 200% of the target award.

Written by: Barbara Manny, BCR President & Consultant