What Is Variable Remuneration?

The comprehensive compensation strategy places great emphasis on the use of variable compensation. This is because, compared with basic compensation, variable compensation is easier to adjust to reflect changes in organizational goals. In a dynamic environment, variable compensation for larger employee groups can address the changes and challenges faced by employees and organizations. Flexible responses to complex challenges not only connect employees and the company in a positive way, which facilitates the establishment of partnerships between the two parties, but also encourages teamwork. In addition, on the one hand, variable compensation can provide flexible rewards for employees' performance that is conducive to the success of the enterprise; on the other hand, variable compensation can also help control costs when the business is not operating well.

Variable pay

Operator's

Variable pay is short-term

Variable compensation comes from the principle of performance and risk symmetry in management.

The performance principle believes that the level of incentives for managers must be related to the performance of the company. The better the performance of the company, the higher the intensity of incentives for the operators; the worse the business, the lower the intensity of incentives for the operators. This incentive intensity is quantified as variable compensation.

The principle of risk symmetry believes that, in order to effectively motivate the operator, the incentive mechanism of the operator should be designed in accordance with the principle of symmetric revenue and risk. The better the business, the higher the risk income of the operator: the worse the business is, the lower the risk income of the operator, and even reduce its basic salary. In this way, the operator can bear the corresponding risks and can get a return that is symmetrical with the risk. This encourages the operators to innovate boldly, strive to improve the performance level, and achieve

All the efforts and contributions of the operators and the risks they bear must ultimately be reflected in the business performance of the enterprise. So the most effective way for a business operator to achieve variable pay is to let the business owner have

Stock appreciation rights and virtual stocks are a way to provide short-term incentives for operators. The stock appreciation right is the cash or equivalent company stock income obtained by the operator after exercise, and does not involve changes in the company's property rights. Divided into the purchase type (the incentive object purchases the company's stock at the beginning of the period according to the net asset value per share, and the end of the period is sold back to the company at the end of the net asset value per share) and the virtual type (the incentive object does not spend funds at the beginning of the period, the company grants a certain number of nominal shares At the end of the period, the company calculates the income based on the increase in the company s net assets per share and the number of nominal shares, and pays cash). The plan uses the value-added of net assets per share as an incentive source. It is only an asset-based incentive and does not use the effectiveness of the capital market and the role of return amplification. Operators are less constrained, and when the stock price rises, it will put great pressure on the company's cash outflow. Virtual stocks refer to companies that have been entitled to stocks in the name granted to operators at the beginning of the period, but actually do not have voting rights and residual distribution rights, cannot be transferred, and only enjoy a portion of the income generated from holding these stocks. Divided into dividend income type, premium income type and market value type virtual stocks. Dividend income virtual stocks are also called dry shares, that is, the company grants the operator a nominal number of shares at the beginning of the period. Within a specified period, the operator only has the right to dividend income. The opening value of premium income virtual stocks is calculated at the market fair price at that time, and the operator enjoys the difference between the closing and opening market value of these shares. If the market price of the stock at the end of the period is lower than the market price at the beginning of the period, the operator cannot obtain this income.

Reasons for invalidation of compensation incentives

The difference between the market value type virtual stock and the above two types of virtual stock is that the company pays cash to the operator at the end of the period according to the market value of the stock. Virtual stocks are not substantive stock subscription rights, they are actually deferred payment of bonuses, and virtual stock funds are sourced from corporate incentive funds. It can be seen that virtual stocks also bring strong pressure on cash payments.

As a long-term incentive implementation mechanism, stock options and stock purchases should generally control the proportion of variable compensation above 60070 to make them reflect the goals and effects of long-term incentives. Designing the core of the operator's variable compensation as future compensation can not only meet the operator's expectations for risk and return, but also stimulate it to consider the long-term development of the enterprise, avoid short-term behaviors, and be conducive to the sustainable development of the enterprise. Stock options provide that the operator has the option to purchase a certain number of shares of the company at a predetermined price (strike price) within the period agreed with the business owner. Stock options have strong long-term incentives and constraints. The incentive effect of stock options comes from the assumption that the stock price of an enterprise is affected to some extent by the profitability and profit growth of the enterprise, and the operator of the company can influence these factors to a certain extent. Stock option income is risk income that is directly linked to the long-term benefits of the enterprise. As a long-term incentive system provided by shareholders to operators, stock options are generally practiced to give business operators a right to allow them to operate within a specific period, usually 3 to 5 years, according to a certain pre-set Price-the so-called "exercise price" for the purchase of the company's common stock. This right cannot be transferred, but the stock purchased can be sold on the market. Under the stock option system, the operator's income depends on the premium between the market price of the company's stock and the exercise price of the option agreement when the option expires. Since the stock price is the present value of the company's future earnings, it reflects the company's long-term strategy. Therefore, if the operator only focuses on short-term benefits, it is impossible to obtain option income. The operator's stock options only allow the operator to enjoy the right to increase the benefits brought by the appreciation of the stock, and generally do not pay dividends to the operator. Manager stock options as a long-term incentive mechanism help resolve the agency problem between shareholders and managers, and achieve the correspondence between residual claims and control rights, so that managers can be encouraged to overcome short-term behavior and pay more attention to the company's strategy development of. Therefore, operator stock options are likened to "golden handcuffs".

Variable pay

Stock purchase is that the company uses ordinary shares as long-term incentive compensation to require the operator to purchase at a preferential price and lock it up for a certain period of time. At the beginning of the period, the company provides low-interest or interest-free loans for operators to purchase stocks. According to different purchase costs and repayment methods, it is divided into fixed cost and fixed payment standard type, fixed cost and variable payment standard type, variable cost and fixed payment standard type, variable cost and variable payment standard type. The fixed cost and fixed payment standard type is that the company allows the operator to buy a certain amount of company stock at one time according to the then fair market price, and repays the loan at a fixed payment amount each year. The difference between the fixed cost and variable payment standard types is that the annual repayment standard of the operator is linked to the performance of the enterprise. If the company's performance is good, the operator can reduce the repayment amount for the year by a certain percentage. On the contrary, if the company's performance is lower than a certain level, it will not be exempted or even charged loan interest. The variable cost and fixed payment standard type requires the operator to purchase company stocks at fair market prices every year. Because the company's stock price changes every year, the cost of the operator's stock purchases is also changing, but the operators pay at a fixed discount rate. . The variable cost and variable payment standard type not only requires operators to purchase company stocks at fair market prices every year, but also the payment discount standard is related to the performance of the year. The enterprise requires the operator to buy the company's stock from the market and lock it up during his tenure. After the company owner owns the company's stock, he becomes a shareholder of the company that owns it, shares risks with the company, and shares income. Stock purchases bind business interests with the company's development through stocks. Because the stock is locked during his term of office, it can only be thrown out after half a year of leaving. Therefore, the short-term behavior of management can be effectively reduced.

Variable pay

There are advantages and disadvantages to different implementation forms of variable compensation. Designing it as a compensation package can complement each other's advantages while reducing the limitations of each part as much as possible. In this combination, the proportion of long-term incentives should be increased to more than 60% to reflect the core and ultimate goal of variable compensation. Cash payments, stock appreciation rights, and virtual stocks are dividends that can be cashed out immediately after performance, which are short-term incentives; use stock options and stock purchases to implement long-term incentives for operators. This not only guarantees the short-term and long-term incentives in the salary package paid to the operator, but also realizes the organic combination of the operator's salary with its performance and risks.