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April 17, 2010
Compensation 101: Fixed and Variable Pay

In a BLR webinar titled "Compensation 101: Essential Secrets and Strategies for HR Professionals," Paul R. Dorf outlined the key considerations for a company to determine the best mix of fixed and variable pay amounts. When determining fixed and variable pay, be sure to consider the competitive market. Determine your position among your peers, and identify the market level of total cash and non-cash compensation.

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Base pay is the fixed amount paid for work performed. It is most dependent on the marketplace. Differences in base pay recognize additional skills and responsibility. Typically, base pay is adjusted annually, but more recently there have been freezes, give backs and smaller budgets. Counter intuitively, base pay is not always related to working conditions, as sometimes poor conditions actually have low pay as well. Historically, base pay levels recognized seniority over performance. However, mixed messages are the biggest concern if you take this approach.

Variable compensation, on the other hand, should be linked directly to performance and accomplishments. Variable compensation components generally increase as you move up the organization. Using variable compensation components allows you to control fixed costs while providing a competitive pay package. It provides the direct linkage of pay to performance. These factors help to focus, attract, retain, and motivate employees.

Paul Dorf is the Managing Director of Compensation Resources, Inc. (CRI). CRI (www.compensationresources.com) specializes in providing comprehensive Compensation and Human Resource consulting services. Dorf is responsible for directing consulting services in all areas of executive compensation, short and long term incentives, sales compensation, performance management programs, and salary admin programs.

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