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

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

We have recently implemented a Performance Variable for certain salary slabs, which are payable only if the company achieves two things: EBITDA (Earnings before interest, tax, depreciation, and amortization) and targets. Currently, what was initially projected by each stakeholder/HOD at the beginning of the financial year is nowhere close to the achieved targets. Therefore, there won't be any variable payable in Q1 and Q2, respectively.

My query is: How can we address the situation of no variable payment for two quarters? I understand that there will be expectations from individuals who have a variable component in their salary, and this may lead to demotivation among team members. What could be a possible solution here?

Hi,

Those eligible employees might have some apprehensions that, despite their best efforts, variable pay is not paid to them. You need to call and explain to those employees with proper supporting papers what the actual target was and what they have achieved. The common thought process among employees may be that management, in order to avoid paying variable pay, is providing incorrect numbers.

Therefore, a 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 providing sufficient information. Please confirm 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, 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 EBITDA is? What is the proportion of fixed salary and performance pay (based on EBITDA)? What were the EBITDA figures for the last five years, and what is the target for the current FY?
d) Are the employees educated on what they should do to increase the company's EBITDA? What about your department?
e) If all employees or departments meet the target, the EBITDA target should be achieved. However, which department's performance has hindered the EBITDA?
f) How did your department measure its efforts to achieve the required EBITDA?

Final Comments: Performance pay linked to EBITDA is not a new concept but should be in addition to regular targets for employees or departments.

To achieve the EBITDA target, specific sales need to occur with a certain profit margin. However, what if salespersons fail to secure orders? What if orders are received but cannot be fulfilled due to operational issues or production bottlenecks? If the fault lies in inadequate capacity or competent manpower, who is accountable?

Introducing a new, indirect target has opened a Pandora's box for your company. Failure of any department may prevent the EBITDA target from being met, leading to a futile pursuit. Hopefully, this continuous chase does not lead employees to doubt the sincerity of top leadership and view it as a tactic to avoid performance pay.

Thanks,

Dinesh Divekar