Compversation #25 - The Future of Variable Pay?

When was the last time you reviewed your variable compensation policy?

If you’re like 44% of companies, it’s been at least six years. That’s one of the key findings from the latest Variable Compensation Barometer, published in March 2025 by People Base CBM.

In another study conducted by HR Catalyst Consulting, 80% of organisations now offer variable pay, representing a 2% increase from last year, and 10% increase from several years prior. 

So, does that mean variable pay represents the future of compensation? 

I’m not so sure. And not only because nearly half of companies fail to regularly adjust their policy to match market conditions.

Over the years I’ve spent advising and supporting companies with their compensation and benefits strategies, I’ve often seen leaders dissatisfied with their variable compensation plans, especially annual or quarterly performance-based bonuses.

It’s the kind of system that looks great on paper: a clear way to motivate teams by aligning performance and reward.

“The better you perform, the more you earn” … this win-win mantra should, in theory, help companies achieve their strategic goals. But in practice, it’s rarely that simple.

Here’s what I’ve learned from talking to companies trying to improve their variable compensation strategies, from common implementation pitfalls to the most effective solutions.

Objectives that aren’t so objective 

When we think of variable pay, one specific use case comes to mind: Sales teams.

Generally, they’re seen as highly responsive to performance-based rewards. And their commissions are easy to calculate as their earnings are directly linked to the contracts they close. While there are plenty of potential implementation challenges, most companies manage it fairly well.

The problems start when we try to extend this model to other teams, especially those without easily quantifiable goals, like tech or communications.

Beyond the difficulty of setting SMART objectives (specific, measurable, achievable, realistic, and time-bound), goals defined at the start of the year can quickly become irrelevant as business conditions change. 

Markets move fast, but variable plans often don’t. So, whether objectives were poorly calibrated from the start, or the company plan simply didn’t hold up, by the time performance reviews roll around, targets may no longer make sense.

What do managers do then?

Remember, they’re often overloaded and juggling increasing responsibilities. This process adds another layer of stress. So, in many cases, managers end up granting the bonus by default, reluctant to penalise employees for flawed objectives. This can create tension and anxiety, often overshadowing performance reviews that should be constructive moments for feedback and growth.

As a manager, I’ve experienced that frustration myself, sitting down with team members not to discuss development or achievements, but simply to answer “Did I get my bonus?”

It’s a wasted opportunity for meaningful professional growth.

What’s the ideal strategy for motivating teams? 

Implementing a variable pay policy is complex. But is it worth it? 

Maybe … if it truly helps motivate employees and attract candidates better than any other system. But that’s not always the case.

Starting with hiring: as a recruiter, I’ve often met candidates who focused only on the fixed salary when assessing an offer. Even in companies that regularly paid out more than 100% of the variable component, like when I worked at Criteo, many candidates saw it as uncertain and negotiated for a higher base salary instead.

And once they joined, with a higher fixed salary, they still received 100% of their variable pay like the rest of the team..Yet it wasn’t a factor in attracting them to the company, which makes you wonder if those extra costs are really justified.

It’s easy to understand why candidates prefer this: from a practical standpoint, a salary heavily weighted toward variable pay can be a barrier to things like getting a mortgage. Many banks don’t fully take bonuses into account, if at all. That’s why many employees would rather earn €67k fixed than €60k fixed plus €10k variable.

As for motivation, variable pay isn’t necessarily the best way to foster it. By focusing on extrinsic motivation (rewards), we often overlook intrinsic motivation (interest, purpose, mastery), which tends to be more powerful and sustainable. That’s especially true for creative or complex tasks, where financial incentives can even backfire.

Rethinking your compensation strategy 

Still, many companies rely on variable pay as a form of differentiation in the age of transparency.

As pay gaps become harder to justify, some see it as a way to distinguish top performers.

But can we really count on variable pay for that? Not necessarily. Variable pay isn’t a loophole to avoid transparency requirements — upcoming EU regulations will include bonuses and incentives, too. 

Worse still, in potential disputes (which are likely to become more frequent as employees become more aware of their rights), lawyers will probably focus first on the variable components of pay, as they often already do. A compensation policy that’s not clearly defined or consistently applied can expose companies to real risk.

That doesn’t mean variable pay will disappear in the age of transparency; it just means success will depend on the quality of your performance reviews. If you make those genuinely effective, linking part of pay to them can make sense.

Personally, I’m curious to see how this evolves in the years ahead, as transparency grows. I’ve worked with several companies that I encouraged to challenge their variable compensation plans, to make sure they truly made sense.

Of course, variable pay is still relevant for sales roles and executives whose results are directly tied to company performance. But as clear, logical objectives are hard to define, perhaps the best solution is to abolish variable pay altogether. I’ve seen many companies reintegrate it into fixed salaries, and be very happy with the result.

That said, variable pay still has one undeniable advantage, much appreciated by CFOs: when bonuses depend on company results, they provide a valuable adjustment lever in tough times.

In any case, it’s a topic I’m passionate about, and I’d love to hear your perspective.

How are you managing these issues in your company? Write and let me know. 

To continue the conversation 

Here’s a selection of articles to feed your thinking. And as always, feel free to share any pieces you’ve found insightful!

Compensation Packages That Actually Drive Performance — Boris Groysberg, Sarah Abbott, Michael R. Marino and Metin Aksoy — Harvard Business Review

This HBR article explores why many performance-based pay systems fail to deliver the expected results, and how to design compensation plans that truly motivate employees. It highlights the importance of balancing short-term incentives with long-term engagement, and ensuring pay structures reinforce rather than distort company values.

Incentives and Recognition: An Evidence Review — Chartered Institute of Personnel and Development (CIPD) 

This research review examines the real-world effectiveness of financial incentives and recognition schemes across different industries. The findings challenge the assumption that variable pay always boosts performance, showing that the impact depends heavily on job type, company culture, and how fairly the system is perceived.

Pay for Performance — A Mirage? — Cydney Posner — Harvard Law School Forum on Corporate Governance

This analysis questions the validity of the “pay for performance” principle in executive compensation. Drawing on global corporate data, it argues that variable pay often reflects broader market trends rather than individual impact, raising important questions about the link between reward, accountability, and transparency.