Variable Remuneration: what is it?

Posted by Mereo
at Monday August 26th, 2013.

So, what is it?

In regards to remuneration linked to performance, variable compensation is a reward paid based on results during a specific period. It may be applied in any situation where there are performance indicators, that is, executives, car salespeople or workers in an assembly line can receive this benefit. It is necessary to take into consideration the utilization of the grades reached in a determined set of rules, previously established by the organization, or what we call “the rules of the game”, because once they are defined for that period, they cannot be altered, in order to maintain the program’s reliability.

How is it known around the world?

Variable compensation is known through several names in Brazil and abroad. The English terms are P4P – Pay for Performance, PRP – Performance-Related Pay, Incentive Pay, Performance-Based Pay, Value-based Purchasing e Variable Compensation. In Brazil, the term is similar to a bonus, however, it is commonly referred to as Variable remuneration.

Where can it be applied?

One of the accounting objectives from this technique is to transform fixed cost into variable, which is why it can be done by means of premiums, incentives, gratifications, shareholding and profit share. In the USA and UK we have found this practice is strongly used in the health field, where employees are rewarded for achieving pre-established goals in the provision of health services. It was a fundamental change in payment of fees for these services, generating therefore, a variable value to be paid. In Brazil, the Variable Compensation movement grows day by day, demonstrating that it is loyal to its purpose of strategy alignment, commitment and expected results. That is why we can see large companies using this method in different sectors, for instance, mining, outsourcing, human resources and health, among others.

Field of Knowledge

Although Variable Compensation involves finances, management and planning, it is studied further as a Human Resources subject.

Variable Compensation step-by-step

A Variable Compensation program can be built using the following steps:

  1. Definition of indicators: This is the basis for the program, it clarifies what and how it will be evaluated. Today we have a wide range of assessment techniques and methods, usually the indicators are articulated with targets, which in turn, show alignment to strategic company goals from a collaborator, a field, or even the organization, an example is the EBITDA.
  2. Definition of rules: Secondly, payment groups should be created, where a balance between fields and different organizational levels is done, creating the mathematical formula and the award curve to which the collaborators are submitted. In addition, during this stage the eligibility criteria must be defined for all participants.
  3. Perform, at least once a month, a follow-up on indicators, showing on a panel, TV or through the Intranet how the achievement of these goals is developing. This visual display will work as a thermometer for all of those who involved and yet, if the team’s considerations are done in an interdependent manner, then the accomplishment of targets will be everyone’s concern.

Naturally, these stages depend on a lot of effort and must be built together with management consultants and experts who are skilled in understanding the law 10.101 from 19/12/2000, so no losses incur to any of the parties.

Available tools

 The Mereo system is accessible from any part of the world.

A remarkable tool that assists this whole process is Mereo. The tool is entirely online and has follow-up modules that facilitate the target/indicators management, transforming the management into a much more practical, easy and visual task. The Mereo has also a Variable Compensation module, where it is possible to adapt any meritocratic module and its mathematical formulas in record time, freeing companies from excessive Excel spreadsheets and complicated formulas for each cell. Therefore, allowing the manager to concentrate in tasks that are more important to his or her work and leave Mereo the software to Mereo Consulting, because this is our expertise.

Author: Ivan Nascimento Feliciano

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