Variable compensation can be an incredibly powerful tool that your organization uses to direct seller attention toward the outcomes that matter most, such as hitting or exceeding quota, prioritizing a certain product mix, focusing on margin expansion over straight revenue, or something else entirely.
But to be truly effective over the long term, your variable compensation program must be capable of evolving alongside your business. It must be flexible enough to adapt as you expand into new markets, add or adjust territories, introduce new roles, change your operating model, or adjust performance priorities.
Successfully scaling your variable compensation program means that you need to have a consistent strategy for adding new plans, making adjustments, and governing plan mechanics and changes, while preserving enough flexibility to account for different roles, employee populations, and business needs. It also means having the right technology in place to support your goals.
In the guide below, we take a closer look at what variable compensation is and how enterprise growth can and should affect your compensation strategy. We also offer a number of best practices you can use to inform your strategy and ensure it’ll be an asset and not a hindrance as your organization scales.
Variable compensation, sometimes called variable pay, is any compensation an employee receives in addition to their base pay, and which varies depending on individual, team, or company performance. As such, it’s a form of incentive pay designed to motivate individual contributors (like your sellers) and teams to hit quota or achieve other performance goals.
Variable compensation is best understood in relation to an employee’s fixed and total compensation:
While it’s often discussed as a single category of pay, variable compensation actually comes in a variety of forms, each of which may be better suited to incentivizing specific employee actions. Common forms of variable pay found in the context of sales teams include:
Many organizations design and implement their first variable compensation plan relatively early in their existence as a company — often, they have a relatively small sales team selling a small number of products in a single territory. This simplicity is why early plans are often managed and tracked with spreadsheets or other home-grown solutions.
But as a company grows and scales, its structure and its selling strategy typically become more complex. Common drivers of this complexity include:
As this complexity grows, processes and technologies that work for smaller and simpler organizations may struggle to keep pace. Managing a growing number of plans, rules, employee populations, and exceptions through spreadsheets or other home-grown solutions can make it more difficult to maintain consistency and adapt plans efficiently. If your variable compensation plan can't meet these challenges, it becomes a liability instead of a strategic lever.
To account for all of this increased complexity and nuance as your organization scales, you should implement a framework that allows you to standardize certain aspects of your compensation strategy without compromising the flexibility required to manage multiple comp plans.
Standardizing key aspects of your compensation strategy helps you maintain plan fairness, and with it, seller trust. At the same time, it ensures you have logical plans in place for governance, approvals, and change management.
The goal here is not that all plans be designed identically. Rather, it’s to establish the common principles that determine how plans are designed, evaluated, changed, and communicated across your organization. For example, you might standardize things like:
By standardizing these principles, you’ll create a common foundation that informs your variable compensation program, without forcing every employee population, role, or region to operate under an identical plan.
At the same time, it’s important to recognize that different roles, business units, markets, and strategic priorities might require different approaches to variable compensation. Even when those plans operate under the same governance framework, you need to maintain enough flexibility to tailor individual compensation plans as necessary.
Exactly how much flexibility your organization requires will depend on your seller population, organizational structure, product mix, and markets, but common areas include:
Instead of eliminating all variation between plans, your goal should be to ensure that variation is intentional when it occurs, and that it still falls within the guardrails you establish for your overarching compensation strategy.
Keep the following best practices in mind as you design your variable compensation plan so that you can be sure the compensation strategy you implement is one that can scale alongside your business.
Variable compensation often becomes difficult to govern effectively when multiple teams — like RevOps, HR, compensation, sales, business development finance, etc. — contribute to how the plan is shaped but responsibility for key decisions remains unclear. Whatever your organizational structure, it’s important that you clearly define who owns compensation program design, approvals, exceptions, communication, measurement, and source data. Otherwise, critical decisions can fall through the cracks between teams.
While exact responsibilities may vary from organization to organization, in practice it often looks something like this:
Variable compensation is more credible and effective when employees clearly understand the connection between their actions, measured performance, and the potential reward. With this in mind, the measures you use to inform compensation should reflect both current business priorities and specific outcomes that employees can meaningfully influence.
Exactly what those measures look like will depend on the role. A salesperson might be measured against revenue, margin, bookings, or product mix, while a customer success employee might be measured against retention or expansion. Other roles may warrant measures tied to team performance, business-unit results, or company profitability.
As you evaluate potential measures, consider how much control an employee has over the outcome, how important that outcome is to your broader business strategy, and how much weight it should carry relative to individual, team, business-unit, or company performance. You should also consider whether rewarding a particular outcome could inadvertently encourage unwanted behavior. For example, heavily incentivizing revenue could encourage sellers to prioritize lower margin deals if profitability also isn’t accounted for.
Before the performance period begins, clearly define who is eligible for variable compensation, what performance thresholds apply, how individual measures are weighted, and how different levels of performance translate into payouts.
As market conditions and business priorities shift, your variable compensation program needs to shift alongside them. Consider establishing a regular review cycle to evaluate plan performance and whether existing measures, incentives, and structures remain aligned with your goals. This allows you to make changes proactively rather than reactively.
When plan changes are required, you’ll need a clear process and requirements for who can propose, review, and approve them. Exceptions, especially, must be clearly documented to avoid disputes and maintain fairness across the program.
It’s also important to distinguish between temporary incentives and permanent program changes. A short-term incentive designed specifically to support an immediate priority shouldn’t automatically become a part of your broader compensation structure.
Your variable compensation plan can lose its credibility if employees don’t understand how their performance translates into earnings, no matter how well-designed the plan. That’s why it’s so critical to document your plan’s measures, eligibility requirements, payout rules, and changes in plain language. It’s also why employees should be given visibility into their progress throughout the performance period, not just at the end.
It’s also important to establish clear processes for employees to ask questions about the plan, and to address exceptions, disputes, or corrections as they arise.
Technology should support your variable compensation plan, not limit it. An ideal incentive compensation management (ICM) platform makes it possible to connect performance and compensation data, uses AI to automatically apply established rules, and follow workflows (approvals, disputes, etc.) consistently. It also gives employees visibility into what matters most to them: Progress, quote, and earnings for sellers and customer service agents, program costs and performance for plan administrators.
These capabilities become increasingly important as your business scales and your compensation plan becomes more complex with additional roles, employee populations, programs, territories, and markets.
Importantly, technology can’t determine what your compensation plans should reward, who should have authority over approvals and exceptions, or how and when plans should change. Your organizations need to make those decisions first. An ICM platform can then provide the infrastructure to apply those rules consistently and give employees and admins the visibility they need to manage changes as your compensation program scales.
Your variable compensation plan is more than just a payout mechanic. It’s a strategic lever that you can pull to influence seller actions and incentivize the results you want prioritized.
The challenge in designing an effective plan is to balance competing needs for consistency and flexibility. Clear ownership over plan components, logical measures, transparent communication, and ongoing refinement are all an important part of getting variable compensation right. Also important is ensuring you have the right technologies in place to support your strategy, such as an incentive compensation management platform.
Varicent incentive compensation management software helps enterprise teams manage complex incentive compensation programs at scale, with capabilities for AI-powered plan design and administration, calculation and payout management, reporting, and governance.
Connected sales planning capabilities also help teams align compensation decisions with territory and quota planning so that you can be sure all of your plan components are working together rather than in isolation. Together, these capabilities give you the infrastructure you need to adapt your variable compensation strategy as business priorities and market conditions evolve, while maintaining control and consistency over your broader program.
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