A review of the pros and cons of variable pay plans indicates that the major problem with variable pay is in the administration of such plans.
Most variable pay plans tend to focus on quantity over quality, with tangible units of measurement such as quantity produced or number of customers served being the basis of measurement rather than factors such as customer satisfaction, which are qualitative and difficult to measure.
Incentive plans designed without much planning or thought, and without the constant monitoring by top management lead to employees manipulating the system. For instance, a straight commission method of variable pay may lead to mechanics selling unnecessary repairs to customers.
Variable pay, while rewarding performers also punishes non-performers who may not meet the desired targets due to genuine reasons or owing to factors beyond their control. For instance, an employee on a genuine sick leave might fail to match the production quota, leading him or her to miss the variable pay.
Variable pay, while creating a culture of performance can also lead to cutthroat competition among employees that ruin relationships and retards teamwork. Excellence depends on effective teamwork where everyone learns from each other. Distributing rewards on an individual basis creates competition and destroys cooperation. Some organizations try to overcome this fallacy by offering group incentives, instead of individual incentives.
A far greater risk of variable pay schemes however is that it discourages risk taking. Incentive comes when employees adhere to stipulations, and critics contend that most incentive plans are manipulative and steer workers to a desired behavior, treating employees like a cog in the machine. The prospect of offering group or even individual incentives make supervisors force employees to work unpaid overtime or skip breaks.