Focus on Variable Pay During Merit Freezes

By Juliet Rohrer Feb 1, 2011

In the aftermath of the 2008-09 recession, many organizations continue to face merit freezes and lower-than-industry-average budgets for base salary changes. In the public sector, for example, 2011 brought a two-year freeze on merit increases affecting the federal government and several of its prime contractors.

Merit freezes present the following challenges to staffing and compensation administration:

Growing concerns on how to recognize and motivate performance under a pay-for-performance philosophy when there is no budget to devote to merit increases.

Increased difficulty attracting new talent because of the understanding that their base salary will not increase with merit.

Struggles to retain a qualified workforce when the budget for merit increases within other companies or industries is beginning to rebound.

Declining morale among staff working alongside bargaining unit represented employees who are guaranteed base pay increases.

Variable Pay Programs

What can a company do when faced with a mandated merit budget freeze? One alternative is to focus on the variable vs. fixed pay components. Variable pay programs such as incentive plans, profit-sharing plans, recognition programs and bonuses can enhance the total compensation mix. Below are important questions managers and HR professionals should be asking themselves.



While variable pay programs might require additional effort, time and resources to administer, successful ones will pay for themselves—or at least offer value to the employees at a cost usually lower than merit increases. Below are some variable pay programs ideas that can be implemented quickly and changed or removed afterward without a significant blow to employees.

Recognition programs. Ranging from simple items like certificates to rather large monetary awards, recognition programs are a great way to offer praise to employees. When kept simple, they allow for the flexibility of immediate action. For example, an on-the-spot program could be created to reward employees who went the extra mile when it came to safety compliance during an unanticipated project. Awards could be a gift certificate to the company store and a personalized thank you note signed by their direct supervisors.

One memorable recognition program was simply done by a manager who took compliments e-mailed to him by customers and retyped onto note cards. These kudos were then passed out during a weekly staff meeting wherein the manager reaffirmed his personal appreciation for the employees’ actions. This became contagious and co-workers started creating similar kudos cards for others outside of their immediate team, and many employees hung them on their desk as reminders of their positive achievements.

Bonuses.These payments can have a large impact on employee performance and should be tied to important company initiatives. Recruitment bonuses, for example, are an excellent way to expand a candidate pool while encouraging company loyalty and retention. When implementing a new bonus program, don’t forget to consider the impact of taxation on the final take home pay.

In order for a bonus to be effective, it should be significant enough that recipients adjust their behavior to want to earn a bonus. The appropriate monetary value can vary greatly according to industry, employee classification and geographical location. Informal conversations with employees, surveys or even focus groups can provide helpful insight as to the level of awards that would be insulting vs. motivational.

Impact on Personnel

Although there is conflicting data as to the true impact that variable pay programs can have on the workforce, the potential for impacting a company’s performance metrics and initiatives should not be overlooked. Developing the right mix of programs at the right time and ensuring manager buy-in and employee awareness are critical.

The first step should be initiating a cross-functional team to identify what programs should be created or revised. With well-laid plans, the opportunities to have a positive impact are numerous. Consider the cycle below.


With the Baby Boomer generation approaching retirement, organizations facing merit freezes can find themselves struggling to maintain the service of these seasoned, knowledgeable employees. Moreover, freezes hurt younger generations, straining new hires with lower wages.

For HR professionals dealing with a merit freeze, now might be a good time to evaluate variable pay programs. Those efforts might help reduce the negative impact on the skilled staff the organization needs to retain.

Juliet Rohrer, MBA, PHR, is a senior HR specialist in Washington. Her areas of interest include compensation, benefits, compliance and building HR’s role as a strategic partner within organizational structure and communications.​

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