Optimizing fixed and variable compensation costs for employee productivity
International Journal of Productivity and Performance Management
ISSN: 1741-0401
Article publication date: 1 February 2006
Abstract
Purpose
The purpose of this paper is to develop a conceptual framework to determine the optimal balance between fixed and variable compensation costs incurred by a firm.
Design/methodology/approach
In 2004 Burke and Terry used an economic framework to demonstrate how variable pay can reduce operating leverage and hence increase a firm's value. Their theme is extended to develop a conceptual framework for ascertaining the optimal balance between fixed and variable pay components.
Findings
As demonstrated with an example, the choice between fixed and variable pay affects the firm's employee productivity, operating leverage, market risk, cost of capital, and cash flows. The ultimate choice of the variable and fix compensation “mix” should meet the goal of management – maximizing the firm value, and hence the shareholders' wealth.
Practical implications
Evidence suggests there is a growing use of variable pay schemes in firms to increase employee motivation and productivity.
Originality/value
The framework allows a firm's cash flows to vary due to the changes in the variable pay component.
Keywords
Citation
Burke, L.A. and Hsieh, C. (2006), "Optimizing fixed and variable compensation costs for employee productivity", International Journal of Productivity and Performance Management, Vol. 55 No. 2, pp. 155-162. https://doi.org/10.1108/17410400610641726
Publisher
:Emerald Group Publishing Limited
Copyright © 2006, Emerald Group Publishing Limited