In all companies, variable pay is based on a simple principle: to encourage performance.
So the first fundamental question to address is: what performance, exactly?
Because behind every variable plan lies a structuring choice: the KPIs (Key Performance Indicators) used to measure and remunerate performance: an unsuitable KPI not only creates an erroneous measure of expected performance, it also creates behaviors that are misaligned with the company's interests.
Here are the must-have KPIs... and those best avoided.
In the vast majority of companies, financial KPIs remain at the heart of the system.
The most commonly used are
sales
margin
sales volume
Why they are essential:
They reflect the ability of teams to transform an action plan into tangible results.
They complement each other. For example, when the sales team has a hand on the level of discounts granted, the same sales generated by two employees does not necessarily mean the same performance if the level of discount granted varies significantly between the two employees. The use of a "margin" KPI is therefore a useful complementary concept for assessing the real performance of teams.
They make it possible to link the variable compensation budget distributed with the company's financial capacity, derived from its economic performance.
The main limit to the exclusive use of this category of indicators is their exclusive focus on the short term, without encouraging the creation of conditions for strong, long-term economic performance.
These KPIs are particularly used when sales models are based on recurrence (SaaS products...).
Examples include
churn rate
customer retention rate
lifetime value
Why they are useful :
they reflect real customer value
they reflect a long-term vision
The collection and reliability of these KPIs have become widespread over the last 10 years. They are now sufficiently precise to be used in bonus plans by many companies.
Indicators used :
NPS (Net Promoter Score)
CSAT (Customer Satisfaction)
customer feedback
Objective:
align performance and customer experience
avoid short-termist behavior
encourage quality of advice
These KPIs are particularly used in the service and retail industries.
In many sectors (industry, logistics, services), performance is not limited to sales or short-term economic performance, but includes a notion of operational performance.
Examples of operational KPIs :
on-time delivery
quality
productivity
error rate
Why they matter :
they reflect the organization's real efficiency
they allow us to value non-business functions which are nonetheless on the critical path to the smooth running of the company.
More and more companies are introducing collective indicators.
Examples include
team performance
inter-team objectives
business unit results
Objectives :
reinforce real collaboration between employees or teams whose conditions for success are concretely linked
align teams on a global objective, not just on their own activity.
While the use of collective components is now standard practice, the weight they are given in a bonus plan is still a complex matter of arbitration, if collective issues are to be adequately reflected without sacrificing the necessary emphasis on individual performance.
Assessing the quality of an action plan's implementation, independently of the short-term economic benefits it generates, is increasingly becoming a classic element of a bonus plan, as an incentive to create the conditions for tomorrow's success.
Best practices in design :
create the conditions for accurate, indisputable evaluation, avoiding overly "macro" assessments
if necessary, cross-reference qualitative performance with quantitative performance to manage budgetary risk, particularly when economic performance is not on target
provide the means to monitor and drive thedeployment of action plans throughout the performance cycle.
These criteria are no longer reserved for certain industries with the capacity to build, monitor and evaluate this type of KPI, as was more the case some fifteen years ago. They can now be used and are used extremely widely.
This is probably the most recent and least developed development to date, outside of management committees. Companies are integrating KPIs linked to their strategic priorities.
Examples:
digital transformation / AI
CSR performance
...
Why they can be powerful:
the variable becomes a tool to support transformation, so that it can be carried out with all the energy needed to make such projects a success in the short term
it focuses efforts on the company's medium- and long-term development prospects.
The main difficulty often lies in identifying sufficiently detailed and assessable criteria for inclusion in a bonus plan.
Alongside the families of indicators mentioned above, certain KPIs can pose problems, sometimes insidiously.
This is probably the most critical error. Employees must be able to act on their KPIs, otherwise they will not be able to generate any motivation.
Examples to avoid in a motivating bonus plan
overall company performance for a highly operational role
strategic decisions outside the employee's perimeter
...
A frequent temptation: wanting to measure everything, even that which sometimes has more to do with job performance, valued by the fixed salary, than with real short-term performance.
Result:
10, sometimes 15 indicators in the same plan
Consequences :
loss of legibility
dilution of priorities
omission of performance criteria that are critical to the company.
In practice, the most effective models use between 2 and 5 KPIs.
A vague KPI is more harmful than an absent one.
Examples:
"service quality" with no clear definition
"commitment" without precise measurement
a managerial bonus without clarification of the conditions for obtaining it.
Result:
different interpretations
disputes
feelings of unfairness
A good KPI must remain :
measurable
objective
indisputable
Some companies combine indicators that steer behavior in opposite directions.
Classic examples:
valuing volume when the priority, driven by the management team, has become profitability
retaining historical indicators that are no longer aligned with the evolution of the strategic plan.
Result:
the employee no longer understands the reality of the activity required of him/her.
Consequences :
inconsistent arbitration
frustration
inefficiency
When the construction and therefore the calculation of the performance criterion involves 250 preliminary processing operations, it becomes complex to link the final performance with the associated action plan.
Symptoms :
Employees are unable to feel fully in control of the levers of action available to them to achieve their objectives: they observe final performance more than they construct it throughout the performance cycle.
Calculation complexity
Complexity of animating performance with teams
While there are no good or bad indicators per se, but simply indicators that reflect the company's specifications, their identification and selection must nevertheless meet a certain number of prerequisites, without which the company will not be able to reap the full benefits of the bonus plan.