Performance Variable - How can we deal with the situation of no variable to be paid for 2 quarters?

Hi, I have a query and looking for advice from the HR Experts here.

We have recently implemented Performance Variable to certain salary slabs which are payable only if the company achieves two things EBITDA (Earning before interest, tax, depreciation & amortisation) & Targets. Now we can see what was projected by each stakeholder/HOD during the beginning of the financial year is nowhere close to the achieved targets, hence there won't be any variable payable in Q1 & Q2 respectively.

My query is: How can we deal with the situation of no variable to be paid for 2 quarters since I understand there will be expectations for the people who have a variable as a component into their salary, this will lead to a lot of demotivation amongst the team members? What can be the possible solution here?

Hi,

Those eligible employees might have some apprehensions that in spite of their best efforts variable pay is not paid to them. So you need to call and explain those employees with proper supporting papers as to what was the actual target and what is achieved by them. The common thought process of employees will be like Management in order to evade variable pay payment is projecting wrong numbers.

So some transparent way of sharing actual data is very important.

It appears the target set for Q1 & Q2 was grossly overstated and unrealistic. How do they compare with the previous year's performance? Probably you need to have a slab system starting with last year's achievement as the null point and then build the stretch factor to reward a higher amount for better and more better performance. This problem could have been anticipated and a probable solution worked out before the scheme was introduced. You may consider giving a special incentive as compensation for the extra efforts put in though the employees are not eligible, otherwise, it would be a demotivating factor. The principle in the rewards scheme is to share the gains of productivity. Go by that spirit and convince your top management.

Dear Tanya Sekhon,

You have raised a query without giving sufficient information. Please confirm to us the following:

a) What is the nature of your industry? Are you from manufacturing or the service industry?
b) Is your company a public limited company, and if yes, then is it listed on the BSE? Is the balance sheet of the company easily accessible to all the employees?
c) How many employees understand what is EBITDA? What is the proportion of fixed salary and performance pay (that is based on EBITDA)? What was the EBITDA for the last five years and what was the target for the current FY?
d) Are the employees educated to know what exactly they should do so that the company's EBITDA goes beyond a certain limit? What about your department?
e) If all the employees (or the departments) attain the target then obviously the EBITDA target was supposed to be achieved. But then which department's performance has pulled back the EBITDA?
f) What about your department? How did you measure to know whether your department has done sufficient to achieve certain EBIDTA?

Final Comments: - The performance pay linked to EBITDA is not a new concept as such but it should be over and above the regular targets given to the employees or the departments.

To achieve the EBITDA target, a certain sale has to happen and that too with a certain profit. But then what if the salespersons are unable to bring the orders? What if the salespersons brought orders but these could not be met because of the operational failures or the production bottlenecks? Suppose the fault does not lie with the sales or production personnel but the capacity is inadequate or the manpower is competent. Then who should be blamed?

By adding a new target and that too which is an indirect one, your company has opened Pandora's box. That EBITDA target may not be achieved because of the failure of some or other department and it could become a wild goose chase. I hope because of this perennial chase, employees do not start thinking that the top leadership is not sincere it is just a ploy to evade the performance pay!

Thanks,

Dinesh Divekar