Rethinking variable compensation in a transforming workplace

Why variable compensation is at the heart of hr transformation

Variable compensation has moved from a technical HR topic to a central lever of business transformation. When a company changes its operating model, invests in new technology, or redefines its strategy, the way employees are paid often remains anchored in the past. Yet variable pay is one of the most powerful signals an organization sends about what really matters in terms of performance, behavior, and priorities.

Why variable pay is no longer just a sales topic

Historically, variable compensation was mainly associated with sales teams. Sales reps received commissions and bonuses based on sales performance, while most other employees relied on base salary and occasional discretionary bonuses. This model is no longer sufficient.

Today, many organizations are shifting from pure volume growth to more complex goals: customer satisfaction, profitability, innovation, cross functional collaboration, and long term value creation. As a result, compensation plans must evolve. Variable incentives are now being extended to a broader population of employees, including support functions, product teams, and operations.

This expansion raises fundamental questions:

• How to define performance and targets for roles that are not directly linked to revenue
• How to balance individual, team, and company goals in a single compensation plan
• How to avoid creating silos or unhealthy internal competition through poorly designed bonuses

These questions are not theoretical. They directly impact employee engagement, retention, and the company’s ability to execute its strategy.

Variable compensation as a mirror of strategic priorities

Variable compensation plans are, in practice, a translation of strategy into pay. If a company claims that customer satisfaction is a priority but only rewards short term sales volume, employees will quickly understand where the real focus lies. The same applies when a business wants to promote collaboration but maintains purely individual bonuses with no link to team performance.

In a transforming workplace, variable pay must therefore be aligned with a broader set of company goals, such as:

• Financial results and profit sharing, when relevant
• Quality, risk management, and compliance
• Customer satisfaction and retention
• Innovation, digital adoption, and process improvement
• Cross functional collaboration and knowledge sharing

Different types variable mechanisms can be combined: individual bonuses, team based incentives, sales commissions, and long term components. The challenge is to design a coherent compensation package that employees can understand and that leaders can explain without ambiguity.

From static pay models to agile compensation plans

Many organizations still operate with static compensation packages that were designed years ago, in a very different business context. These plans often over reward short term results and under reward resilience, adaptability, and learning. They also tend to ignore the impact of new ways of working, such as hybrid work, project based teams, and seasonal workforce peaks.

For example, companies that rely heavily on seasonal workers or temporary reinforcements often discover that their variable compensation model is not adapted to fluctuating activity. This can create unexpected cost spikes, especially when commissions or bonuses are calculated on outdated assumptions. Addressing these issues requires a more integrated view of workforce planning, pay, and operational needs, including how to manage cost spikes linked to seasonal activity.

To support transformation, HR and finance teams are increasingly using data to simulate different compensation plans, test their impact on payroll, and anticipate tax and compliance implications. This data driven approach helps move away from purely historical practices and toward evidence based best practices.

The employee perspective: clarity, fairness, and trust

From the employee point of view, variable compensation is often perceived as opaque or unpredictable. Many employees do not fully understand how their bonuses are calculated, what exact goals they are expected to reach, or how their performance is evaluated compared to their peers. This lack of clarity can damage trust, even when the overall pay level is competitive.

In a context where companies ask employees to be more agile, to collaborate across teams, and to accept frequent organizational changes, the credibility of the compensation plan becomes critical. Employees expect:

• Clear links between their individual goals and company goals
• Transparent rules for bonuses, commissions, and other variable incentives
• Reasonable balance between base salary and variable pay, especially for non sales roles
• Fair treatment across teams and job families

When these expectations are not met, variable compensation can become a source of frustration instead of a lever for engagement. This is why the redesign of compensation plans must be connected with broader work on performance culture, skills development, and governance, not treated as a purely technical HR exercise.

Why now: transformation, risk, and opportunity

Several converging trends make this the right moment to rethink variable compensation:

• Business transformation : new business models, digital channels, and service based offerings change how value is created and who contributes to it.
• Workforce expectations : employees increasingly compare compensation packages across companies and expect more transparency and fairness.
• Regulatory and tax complexity : variable pay, sales commissions, and profit sharing mechanisms must comply with evolving legal and tax frameworks.
• Data availability : organizations now have more data on performance, customer satisfaction, and productivity, which can be used to design more relevant and balanced plans.

For HR leaders, this creates both risk and opportunity. Keeping legacy compensation plans may appear simpler in the short term, but it can undermine transformation efforts and weaken the link between pay and real performance. On the other hand, a thoughtful redesign of variable compensation, aligned with a modern performance culture and supported by robust governance, can become a powerful accelerator for change across the company.

Aligning variable compensation with a new performance culture

Shifting from “pay for results” to “pay for the right results”

In many companies, variable compensation has historically meant one thing: pay more when sales or short term numbers go up. That approach is no longer enough. When the workplace is transforming, the question is not only how much performance employees deliver, but also how they deliver it and whether it supports long term company goals.

Aligning variable pay with a new performance culture means moving from a narrow focus on individual sales performance or output to a broader view of value creation. This includes collaboration, customer satisfaction, innovation, and contribution to cross functional projects. The compensation plan becomes a lever to reinforce the behaviors the business really needs, not just the easiest ones to measure.

In this context, variable compensation is less about rewarding heroic individuals and more about steering the whole system. A well designed plan helps employees understand what matters most, how their goals connect to the strategy, and why some types of performance are now valued more than others.

Defining performance in a transforming workplace

To align variable compensation with a new performance culture, organizations first need a clear and shared definition of performance. That definition is changing fast. It is no longer limited to hitting sales targets or production quotas.

• From pure volume to value: Instead of only rewarding the number of deals closed, compensation plans increasingly consider deal quality, margin, and long term customer value.
• From individual to team contribution: Performance is seen as a team sport. Variable incentives start to reflect how employees support colleagues, share knowledge, and contribute to collective outcomes.
• From output to outcomes: Activities like calls made or meetings held matter less than outcomes such as customer satisfaction, retention, or successful delivery.
• From short term to long term: Short term bonuses are balanced with long term components such as profit sharing or deferred awards linked to sustainable results.

These shifts require better data. Companies need reliable performance metrics that go beyond basic sales numbers. This can include customer satisfaction scores, project delivery indicators, quality metrics, and internal collaboration data. Without this, variable pay risks reinforcing the old culture instead of the new one.

Translating strategy into clear and balanced goals

Once performance is redefined, the next step is to translate strategy into concrete goals that can be used in compensation plans. Employees need to see a direct line between their targets, their bonuses, and the company goals.

A practical approach is to structure variable compensation around a small number of weighted components:

• Business results (for example revenue, margin, or project delivery) to keep a strong link with financial performance.
• Customer outcomes (for example satisfaction, retention, or service quality) to support a more customer centric culture.
• Team and collaboration (for example team scorecards or cross functional project success) to encourage collective performance.
• Individual contribution (for example role specific objectives or skills development) to recognize personal impact.

For sales teams, this often means combining classic sales commissions with additional metrics such as customer satisfaction or adherence to pricing guidelines. Sales reps still receive commissions based on sales performance, but the compensation package also rewards behaviors that protect margin and strengthen long term relationships.

For non sales roles, variable incentives can be linked to project milestones, process improvements, or innovation outcomes. The key is to keep the plan simple enough so employees can understand how their pay is calculated, while still reflecting the complexity of modern performance.

Rebalancing fixed pay, variable pay, and risk

As performance culture evolves, the balance between base salary and variable compensation often needs to be revisited. In a more collaborative and agile environment, extremely high variable components can create unhealthy competition, short term focus, and risk taking that is not aligned with company goals.

Organizations are therefore reviewing compensation packages to ensure that:

• Base salary provides stability and reflects the core value of the role and skills.
• Variable pay is meaningful but not excessive, so employees are motivated without feeling that their financial security depends on factors they cannot control.
• Short term bonuses are complemented by long term mechanisms such as profit sharing or deferred awards, especially for key roles.

This rebalancing also has practical implications for tax planning and budgeting. Companies need to model different scenarios, understand the tax impact of various types variable components, and ensure that the total cost of compensation plans remains predictable. Finance, HR, and business leaders must work together to design plans that are both competitive and sustainable.

Integrating performance management and variable compensation

Variable compensation cannot be aligned with a new performance culture if performance management itself remains unchanged. Annual reviews focused on past results are not enough in a context where roles evolve quickly and teams work in short cycles.

More and more organizations are moving toward continuous performance conversations, with regular check ins on goals, feedback, and development. Variable incentives then become the financial expression of a process that is already happening throughout the year.

Some best practices include:

• Setting a limited number of clear goals per employee, linked to the compensation plan.
• Reviewing goals during the year when business priorities change, instead of waiting for the next cycle.
• Using both quantitative data and qualitative input from managers, peers, and customers.
• Ensuring that pay decisions are supported by documented performance discussions, not only by end of year numbers.

This integration also changes the role of HR. Instead of only administering bonuses and commissions, HR teams act as advisors to managers, helping them design fair goals, interpret data, and communicate clearly about pay. The distinction between traditional HR and a more strategic talent advisor role becomes critical in this transformation. For a deeper view on this evolution, you can explore this analysis on the difference between human resources and talent advisor roles.

Making variable compensation a visible signal of cultural change

Finally, aligning variable compensation with a new performance culture is not only a technical exercise. It is a strong symbolic act. When employees see that bonuses, commissions, and other variable incentives are redesigned to reward collaboration, learning, and long term impact, they understand that the company is serious about change.

This is why communication is so important. Employees need to know:

• Why the compensation plan is changing.
• How the new goals reflect the strategy and the desired culture.
• What data will be used to calculate their variable pay.
• How their team and individual contributions will be recognized.

Transparent explanations, simple examples, and accessible tools to simulate potential bonuses help build trust. Over time, when employees see that the plan is applied consistently and fairly, variable compensation becomes a credible driver of the new performance culture rather than a source of frustration.

In the broader transformation journey, this alignment prepares the ground for more collective incentives, new types of roles, and a stronger focus on skills and employee experience. Variable compensation then supports not only what the business achieves, but also the kind of company it becomes.

From individual bonuses to collective and cross‑functional incentives

Why shifting away from purely individual bonuses matters

For years, many companies have relied on individual bonuses and sales commissions as the main form of variable compensation. The logic was simple : reward the employee who closes the deal, hits the targets, or delivers the project. In a transforming workplace, this approach is increasingly misaligned with how work actually gets done.

Most business outcomes now depend on cross functional collaboration, shared data, and end to end customer satisfaction. When variable pay focuses only on individual performance, it can unintentionally create silos, internal competition, and short term behaviors that hurt long term company goals.

Modern compensation plans are therefore moving from a narrow focus on individual bonuses to a more balanced mix of individual, team, and company based variable incentives. This does not mean removing individual rewards. It means rebalancing the compensation package so that employees are encouraged to think beyond their own metrics and contribute to collective success.

Designing team and cross functional incentives that actually work

Shifting to collective and cross functional incentives is not just a matter of adding a team bonus on top of base salary. It requires a clear compensation plan design, robust data, and a strong link with the new performance culture you want to build.

Some practical types variable of collective incentives include :

• Team based bonuses : variable pay linked to the performance of a project team, a business unit, or a function, with shared goals and clear rules for allocation.
• Cross functional project incentives : temporary compensation plans for strategic initiatives that require collaboration between, for example, sales, operations, and customer support.
• Company wide profit sharing : a portion of variable compensation tied to overall company performance, often based on profit, revenue growth, or key strategic indicators.
• Customer satisfaction based incentives : bonuses linked to Net Promoter Score, service quality, or retention, shared across the teams that influence the customer journey.

In all these models, clarity is essential. Employees must understand how their actions contribute to team results and how those results translate into pay. This is where good performance management, transparent communication, and reliable performance data become critical.

Rethinking sales commissions in a collaborative sales model

Sales teams are often the most impacted when a company rethinks variable compensation. Traditional sales commissions reward individual sales reps for closing deals, usually with a clear percentage based on revenue or margin. But in many organizations, sales performance is now the outcome of a broader ecosystem : marketing, presales, customer success, product, and even finance.

To align sales compensation packages with this reality, companies are experimenting with :

• Hybrid commission structures : combining individual sales commissions with team or regional bonuses to encourage knowledge sharing and joint account management.
• Shared targets : linking part of the variable pay of sales reps and customer success teams to the same retention or upsell goals.
• Non revenue metrics : integrating customer satisfaction, forecast accuracy, or data quality into the compensation plan to support sustainable growth.

These changes require careful calibration. If the link between individual effort and pay becomes too weak, motivation can drop. If it remains too strong, collaboration suffers. Best practices suggest keeping a visible individual component, while gradually increasing the weight of team and company goals in the overall variable compensation.

In some countries, including those with evolving labor regulations, adjusting sales commissions and variable incentives also has legal and tax implications. HR and finance teams need to monitor local rules on bonuses, profit sharing, and variable pay. For example, organizations operating in Southeast Asia often track latest updates on Vietnam labor law to ensure their compensation plans remain compliant when they modify sales incentives or introduce new collective schemes.

Balancing short term rewards and long term value creation

One of the main risks of traditional variable compensation is an excessive focus on short term results. Quarterly bonuses, monthly sales commissions, and annual individual targets can push employees to optimize for immediate gains rather than long term value.

To counter this, more companies are integrating long term components into their compensation packages, such as :

• Deferred bonuses : part of the variable pay is paid over several years, based on sustained performance or risk adjusted results.
• Long term profit sharing : a share of company profits distributed according to multi year performance, sometimes with vesting conditions.
• Strategic project incentives : rewards linked to milestones in transformation programs, innovation projects, or major system implementations.

These mechanisms encourage employees to think beyond immediate sales or operational targets and to invest in capabilities that support the future of the business. They also create a stronger alignment between individual rewards and the long term health of the company.

Practical considerations : governance, tax, and communication

Moving from individual bonuses to collective and cross functional incentives is not only a design exercise. It also raises practical questions about governance, tax treatment, and communication to employees.

Some key points to manage carefully :

• Clear rules and documentation : every compensation plan should specify eligibility, performance metrics, calculation methods, caps, and payment timing.
• Tax and legal compliance : different types of variable incentives, such as profit sharing or sales commissions, can be treated differently for tax and social contributions. HR, finance, and legal teams must work together to avoid surprises.
• Data quality : team and company based bonuses rely on accurate, trusted data. Disputes over numbers can quickly damage trust in the plan.
• Simple communication : employees need to understand how their variable pay works. Overly complex formulas or opaque criteria reduce the motivational impact of compensation.

When these elements are handled with rigor and transparency, variable compensation becomes a powerful lever to support collaboration, align employees with company goals, and reinforce the broader HR transformation agenda.

Using variable compensation to support skills development and new roles

Linking variable pay to skills, not just results

Most compensation plans still reward what employees deliver, not how they grow. In a transforming workplace, this is no longer enough. Variable compensation can become a powerful lever to encourage skills development, new roles, and more agile ways of working, as long as it is clearly connected to the company goals and performance expectations.

Instead of focusing only on short term sales performance or financial targets, leading companies are starting to allocate a portion of variable pay to learning and capability building. This does not mean paying people just for attending training. It means rewarding the effective use of new skills in real work situations, in line with the broader performance culture and business strategy.

Designing compensation plans that reward learning in action

To make this shift credible, the compensation plan needs to describe how skills and new responsibilities influence variable incentives. A few practical approaches are emerging as best practices :

• Skill based components in variable pay : A defined share of bonuses or commissions is linked to the acquisition and application of priority skills, such as data literacy, customer experience design, or cross functional project management.
• Role evolution milestones : When an employee moves from a traditional role to a more complex one (for example, from pure sales to account development or solution consulting), the variable compensation structure evolves with clear milestones and targets.
• Blended performance and development goals : Individual goals combine business outcomes (revenue, customer satisfaction, quality) with development objectives (new certifications, mentoring, participation in transformation projects) that are explicitly part of the compensation package.
• Team based learning incentives : A team can receive a collective bonus when it reaches a defined level of new capabilities, measured through validated assessments or successful delivery of new types of projects.

In all cases, the link between skills, goals, and pay must be simple enough for employees to understand. If people cannot explain how their variable compensation is calculated, they will not trust the system, and they will not change their behavior.

Adapting sales compensation to new roles and customer expectations

Sales teams are often the first to feel the impact of business transformation. Traditional sales commissions based only on volume or short term deals can conflict with new priorities such as long term customer satisfaction, subscription models, or complex solution selling.

To align sales performance with the new reality, many organizations are rethinking the balance between base salary and variable incentives, and the way commissions are calculated. Some concrete shifts include :

• From pure volume to value and quality : Sales reps are rewarded not only for the amount sold, but also for margin, product mix, and customer retention, which better reflect long term company goals.
• Incentives for new sales roles : As roles such as customer success, inside sales, or sales enablement grow, compensation packages integrate variable pay components that recognize their contribution to the sales cycle, even if they do not close deals directly.
• Shared commissions for cross functional deals : When complex opportunities require collaboration between sales, technical experts, and service teams, the compensation plan can include shared commissions or profit sharing mechanisms to avoid internal competition.
• Customer satisfaction as a variable component : A portion of bonuses is based on customer satisfaction indicators or renewal rates, encouraging behaviors that support sustainable relationships rather than one time transactions.

These changes require reliable data and clear rules. Without transparent metrics and robust systems, variable compensation for sales teams can quickly become a source of frustration and disputes.

Using variable incentives to support internal mobility and new careers

Transformation often means new types of roles, especially in digital, analytics, and cross functional project work. If the compensation plans do not reflect these new career paths, employees may hesitate to move away from familiar positions where the variable pay is predictable, such as traditional sales or operational roles.

Variable compensation can actively support internal mobility when it :

• Reduces the financial risk of moving : Temporary guarantees or transition bonuses can protect employees who accept new roles where the variable pay model is still maturing.
• Rewards early adopters : Employees who take on pioneering roles in new business areas can receive additional variable incentives linked to the success of pilot projects or new services.
• Recognizes mentoring and knowledge transfer : People who help others acquire new skills, for example by coaching colleagues or leading communities of practice, can have this contribution reflected in their variable compensation.
• Connects career steps with compensation packages : Each step in a new career path comes with a clear description of how base salary, variable pay, and long term incentives evolve, so employees can plan their development.

When employees see that the company is ready to align pay with new responsibilities and skills, they are more likely to engage in transformation efforts and accept new challenges.

Managing tax, compliance, and data challenges

Linking variable compensation to skills and new roles also raises technical questions. Different types variable incentives, such as bonuses, commissions, and profit sharing, can have specific tax and legal implications depending on the country and the employment status.

HR and finance teams need to work together to ensure that each compensation plan is compliant, documented, and auditable. This includes :

• Clear definitions of all variable components in employment contracts and policies.
• Reliable data sources for performance, skills, and targets, with regular checks to avoid errors in pay calculations.
• Consistent treatment of employees in similar roles, to reduce the risk of disputes and claims of unfair treatment.
• Simple communication materials that explain how tax and social contributions apply to different variable incentives.

Good data quality is essential. If performance or skills data is incomplete or inconsistent, it becomes difficult to justify differences in variable pay between employees or teams. This can damage trust and undermine the broader transformation of the performance culture.

Aligning long term incentives with future skills

Finally, variable compensation is not only about short term bonuses. Long term incentives, such as deferred bonuses or profit sharing plans, can be used to encourage employees to invest in the skills that the company will need in the future.

Some organizations link part of their long term variable incentives to collective achievements in capability building, for example :

• Reaching a defined level of digital skills across key populations.
• Successfully implementing new ways of working, such as agile methods or cross functional squads.
• Developing internal talent pipelines for critical roles, reducing external hiring needs.

By connecting these long term goals with variable compensation, the company sends a clear message : skills development is not a side activity, it is a central driver of performance and a shared responsibility for every employee.

Employee experience, fairness, and transparency in variable compensation

Putting perceived fairness at the center

When variable compensation grows as a share of total pay, perceived fairness becomes a strategic issue, not just an HR topic. Employees compare their bonuses, commissions and profit sharing with colleagues, with other teams, and with what they see in the market. If the logic behind the compensation plan is unclear, trust erodes quickly, even if the numbers are technically correct.

Fairness in variable pay is not only about the amount of money. It is about the coherence between goals, performance, and outcomes. Employees want to see that similar performance leads to similar variable incentives, that sales teams are not rewarded for behaviors that damage customer satisfaction, and that support functions are not forgotten while the sales team collects all the upside.

In practice, this means checking three dimensions of fairness in your compensation plans :

• Procedural fairness : how goals are set, how performance is measured, how disputes are handled.
• Distributive fairness : how bonuses, commissions and profit sharing are allocated across roles, teams and levels.
• Interactional fairness : how managers explain the plan, give feedback and communicate decisions about variable pay.

Organizations that ignore one of these dimensions often see disengagement, higher turnover and more pressure on base salary, because employees no longer trust the variable part of their compensation package.

Designing transparent and understandable compensation plans

Many companies have accumulated layers of variable compensation over time : legacy sales commissions, local bonuses, special incentives, short term campaigns. The result is a complex mix of plans that even HR and finance struggle to explain. For employees, this complexity translates into opacity and suspicion.

A credible compensation plan should be simple enough to be explained in a few minutes, while still aligned with business goals. A useful test is to ask a sample of employees and sales reps to describe in their own words how their variable pay works and what drives their bonuses. If they cannot explain it, the plan is not transparent enough.

Some practical best practices to improve clarity :

• Limit the number of metrics : too many targets dilute focus. For most roles, two or three core indicators of performance are enough.
• Use clear formulas : avoid hidden thresholds or discretionary adjustments that are not documented. Employees should be able to estimate their variable compensation with basic data.
• Align language : use the same terms for goals, targets and payouts in HR, finance and sales tools. Inconsistent wording creates confusion.
• Provide visual examples : charts showing how commissions grow with sales performance or how profit sharing is calculated help employees understand the logic.

Transparency does not mean publishing every individual bonus. It means making the rules of the compensation plan explicit, stable over a reasonable period, and accessible to all employees concerned.

Balancing individual, team and company outcomes

As organizations move from purely individual bonuses to more collective and cross functional incentives, the question of fairness becomes more sensitive. Employees who were used to a direct link between their own performance and their variable pay may fear losing control when team or company goals enter the plan.

A balanced approach often combines several layers of variable incentives :

• Individual component based on personal targets and role specific performance indicators.
• Team or business unit component linked to shared goals, such as project delivery, quality or customer satisfaction.
• Company component tied to global results, for example profit sharing or long term value creation.

The weight of each component should reflect the nature of the role. For a sales rep, individual sales performance and sales commissions may still represent a significant part of the variable pay, while for a product or operations role, team and company goals can be more prominent. The key is to explain why the mix is different by role and how it supports the overall strategy of the company.

Fairness also requires that employees have a real influence on the metrics used. If a large part of the bonus depends on company goals that are far from their daily work, the plan will be perceived as a lottery rather than a performance based system.

Managing data, tax and compliance with integrity

Variable compensation relies heavily on data : sales figures, project milestones, quality indicators, customer feedback. If this data is inaccurate, late or manipulated, the credibility of the compensation plans collapses. Employees quickly notice inconsistencies between what they see in the field and what appears in the bonus calculations.

To protect trust, organizations need robust data governance around variable pay :

• Clear ownership of the data used for bonuses and commissions.
• Regular audits of sales performance reports and other indicators that feed the compensation plan.
• Simple dispute mechanisms when employees question the data behind their variable incentives.

Tax and legal aspects also influence the employee experience. Different types variable of variable compensation (short term bonuses, long term incentives, profit sharing, commissions) can have different tax treatments. If employees do not understand the impact on their net pay, they may feel misled, even if the company is fully compliant.

HR, finance and payroll teams should therefore provide clear explanations of how variable compensation appears on payslips, how tax and social contributions are applied, and what this means for take home pay. This is particularly important when changing compensation packages or introducing new forms of variable pay.

Equity across roles, locations and time

As organizations grow and transform, they often discover that similar roles in different locations or business units have very different compensation packages. Some sales teams may enjoy generous sales commissions, while others work with modest bonuses. Support functions may have no variable pay at all, even when their contribution to company goals is critical.

Addressing these gaps does not mean standardizing everything overnight. It means building a coherent framework that defines :

• Which roles are eligible for variable compensation and why.
• Typical ranges for target variable pay as a percentage of base salary by role family.
• How local market conditions and business models justify differences in compensation plans.

Over time, this framework helps reduce arbitrary differences and supports more consistent employee experiences. It also makes it easier to explain to employees why a sales team in one region has a different commission structure from another, or why some roles have access to long term incentives while others focus on short term bonuses.

Finally, fairness has a time dimension. When the company changes its variable compensation plan, it should manage transitions carefully : grandfathering some rights, phasing in new targets, and avoiding sudden drops in expected pay. Abrupt changes damage trust and can undermine the very transformation the business is trying to achieve.

Role of managers in day to day experience of variable pay

Even the best designed compensation plan can feel unfair if managers do not apply it consistently or communicate it clearly. For employees, the real experience of variable pay happens in one to one discussions about goals, performance and results, not in policy documents.

Managers need support and training to :

• Set realistic but ambitious targets aligned with company goals.
• Give regular feedback on performance, not only at bonus time.
• Explain how individual and team results translate into bonuses, commissions or profit sharing.
• Handle difficult conversations when variable compensation is lower than expected.

When managers are equipped to have these conversations with transparency and empathy, employees are more likely to accept variability in pay, including years when business results are weaker. This human layer is essential to make variable compensation a credible and trusted part of the overall compensation package, rather than a source of frustration or conflict.

Leading change and governance around variable compensation

Making leadership accountable for variable pay decisions

Transforming variable compensation is not only a technical exercise about plans, formulas, or tax rules. It is a leadership and governance challenge. When a company changes how bonuses, commissions, and profit sharing work, it is changing how power, recognition, and money are distributed. That requires clear accountability.

A practical approach is to define who owns what in the compensation plan lifecycle. For example :

• Board and executive leadership validate the overall compensation strategy, the balance between base salary and variable pay, and the link with long term company goals.
• HR and rewards teams design the different types variable incentives, document the rules, model the cost, and ensure compliance with labor and tax regulations.
• Business leaders translate the strategy into concrete performance goals for their teams, especially for sales teams and customer facing roles.
• Managers apply the rules, explain them to employees, and provide feedback on what works or not in day to day performance management.

Without this shared ownership, variable compensation plans tend to drift. Sales commissions are negotiated case by case, exceptions multiply, and employees lose trust in the fairness of the system. Clear governance helps maintain consistency across teams and over time.

Designing decision rules and guardrails

Governance becomes real when decision rules are explicit. A transforming workplace needs fewer ad hoc decisions and more transparent guardrails for variable compensation. This is especially true when moving from purely individual bonuses to more collective and cross functional incentives.

Some practical guardrails that many organizations adopt as best practices :

• Standard structures for compensation plans that define the mix between base salary, variable pay, and long term incentives for each role family, including sales reps, experts, and managers.
• Clear rules for sales commissions such as how to split commissions between sales team members, how to handle renewals, and how to treat deals that involve several business units.
• Caps and floors on bonuses and variable incentives to avoid extreme outcomes that can damage team cohesion or customer satisfaction.
• Eligibility criteria that link variable compensation to both business performance and basic behavioral expectations, such as compliance and ethical conduct.

These rules should be documented in a way that employees can understand. A compensation package is not only a legal document. It is also a management tool that shapes how people prioritize their efforts and how they perceive fairness.

Using data and analytics to steer compensation plans

In a transforming workplace, governance is increasingly data based. Variable compensation generates a large amount of data about performance, pay, and behavior. When used responsibly, this data helps leaders adjust compensation plans and keep them aligned with company goals.

Some examples of how data can support better governance :

• Monitoring pay for performance alignment to check whether bonuses and commissions actually follow the performance patterns of employees and teams.
• Analyzing sales performance to see if the current commission structure drives the right mix of short term revenue and long term customer relationships.
• Checking internal equity across comparable roles, locations, and demographic groups to detect unintended bias in variable pay outcomes.
• Simulating changes to compensation plans before implementation, to estimate cost, impact on different groups, and potential risks.

Data should not replace judgment, but it should inform it. Governance bodies that regularly review compensation data are better equipped to adjust targets, refine performance goals, and correct misaligned incentives before they become structural problems.

Creating cross functional governance forums

Variable compensation touches many functions at once : HR, finance, sales, operations, and sometimes legal or risk. In a transforming workplace, these functions need a shared space to coordinate decisions. A cross functional governance forum is often the most effective way to do this.

Such a forum can :

• Review the performance of existing compensation plans and variable incentives at least once a year.
• Align sales commissions and sales team targets with the broader business strategy and company goals.
• Ensure that new roles and skills, such as data specialists or cross functional project leaders, are integrated into the compensation framework.
• Validate exceptions and special cases, so that they remain controlled and do not become the new norm.

This type of governance body also plays a key role in managing the transition from old plans to new ones. It can coordinate communication, training, and the technical changes needed in payroll and HR systems.

Leading the human side of change

Changing variable compensation is emotionally charged. Employees worry about their pay, their ability to reach targets, and the stability of their income. Sales reps may fear losing control over their commissions. Managers may feel uncomfortable explaining new rules they did not design. Governance must therefore include a strong focus on change leadership.

Some concrete practices that help :

• Early involvement of managers and key employees in the design of new compensation plans, so they can raise concerns and suggest improvements.
• Clear narratives that explain why the company is changing its variable pay approach, how it connects to the new performance culture, and what it means for individuals and teams.
• Training for managers on how to talk about pay, performance, and goals in a transparent and constructive way.
• Transition measures such as temporary guarantees or phased changes to protect employees from sudden income shocks when plans are redesigned.

Leadership credibility is built when the company shows that it cares about both business performance and the financial security of employees. This is especially important when shifting the balance between short term incentives and long term elements like profit sharing or deferred bonuses.

Ensuring compliance, ethics, and risk management

Variable compensation can create powerful incentives, but also significant risks. Poorly designed plans may encourage aggressive sales behavior, mis selling, or short term decisions that damage the company in the long run. Governance must therefore integrate compliance and ethics from the start.

Key elements include :

• Regular reviews of compensation packages and plans by compliance and risk teams, especially in regulated sectors.
• Controls that link variable pay to quality indicators, customer satisfaction, and adherence to internal policies, not only to volume or revenue.
• Clear escalation channels for employees who see problematic practices related to bonuses, commissions, or targets.
• Documentation of decisions and exceptions, so that the company can demonstrate that its compensation practices are consistent and defensible.

When governance integrates these dimensions, variable compensation becomes a lever for sustainable performance instead of a source of uncontrolled risk.

Building a continuous improvement cycle

Finally, leading change in variable compensation is not a one time project. As the workplace continues to transform, new roles appear, business models evolve, and employee expectations shift. Governance must therefore be organized as a continuous improvement cycle.

A simple but effective cycle often includes :

• Plan : design or adjust compensation plans based on strategy, market benchmarks, and internal feedback.
• Implement : communicate clearly, train managers, and update systems and processes.
• Monitor : track performance, cost, employee reactions, and risk indicators using reliable data.
• Review : involve the governance forum to decide on corrections, simplifications, or new experiments.

By institutionalizing this cycle, the company avoids the trap of frozen compensation plans that no longer match reality. Variable compensation remains a living tool that supports evolving goals, new ways of working, and the long term health of the business.