Compensation Tradeoffs

By Thomas P. Johnson Jr.

An effective employee compensation system requires the appropriate mix of fixed and variable pay.

The financial services industry is among the leading industries that use variable pay to compensate its employees. As you’ll read in this issue’s “The Exacting Science of Compensation,” a survey by Scottsdale, Ariz.-based WorldatWork finds that only the real estate, utilities, telecommunications and information/Internet industries rely on variable compensation more than financial services.

This suggests how banking has changed in the last few decades. In an increasingly competitive environment, banks have come to the conclusion that fixed salaries may not be sufficient to focus their employees on sales and service objectives.

“Paying for performance” is a complex issue. Managers struggle to calculate the proper mix between the level of compensation that employees can count on and the level that will vary according to their performance.

Variable pay, which consists of performance-linked incentives, obviously rewards the high achievers. But it can also produce anxiety among many employees, often to the point of provoking turnover. It has been known to encourage the wrong kinds of behavior. Employees can be so fixated on sales that service suffers, for example.

Fixed pay fosters a stable and comfortable environment — but not necessarily what’s needed to support sales. Some incentives must be provided to encourage employees to try harder.

Our article finds that variable pay is being used within limits. Ceilings are being set on variable pay for positions where service rather than sales is the main objective. And, experts are advising that variable pay be targeted, linked to a handful of products rather than across the board. Regular monitoring is recommended to verify progress against corporate objectives.

Of course, corporate objectives are not the only yardstick for success. Ultimately, compensation systems need to meet the needs of employer and employee, both focused on the best interests of the customer. Managers must come up with the right balance in variable and fixed pay — as well as other programs such as benefits, training, coaching and customer satisfaction surveys — to assure that all stakeholders’ needs are met.

Mr. Johnson is publisher of Banking Strategies and president and chief executive officer of BAI.

Copyright © 2005 by Banking Strategies, published by BAI.

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