Understanding the Rising Trend of Variable Compensation
Variable compensation, en the form of bonuses or performance-based commissions, accounted for only 17% of salary increases in 2025, according to PageGroup data. However, this method is expected to become increasingly important as companies navigate the challenges posed by minimum wage hikes.
The Impact of Minimum Wage Increases
Although the minimum wage is a reference point and does not apply to most workers, its increases put pressure on companies to find alternative ways to compensate their employees without broadly increasing costs. Jorge Guerrero, senior director at PageGroup’s Northwest region, predicts that “bonus and incentive topics will regain strength, where productivity will be an important part of salaries.”
Why Variable Compensation Matters
Variable compensation serves as a crucial tool for companies to avoid falling behind the minimum wage while preserving their ability to retain top talent. It creates a “virtuous cycle” where high-performing employees are rewarded with bonuses or incentives, leading to improved company results.
In a scenario where only 17% of those who received salary increases in the past year did so through promotions or performance bonuses, compared to 57% who received only inflation adjustments (according to Michael Page’s 2026 Salary Guide), variable compensation becomes even more critical.
Implementing Variable Compensation
To harness the benefits of variable compensation, companies must set attainable goals and measure performance. Norma Godínez, HR Director at Kelly México, explains that “variable compensation in companies has become a very common tool nowadays. Organizations cannot afford not to pay their salaries, but they can share profits, creating a virtuous cycle.”
Establishing clear performance metrics and designing an incentive scheme based on these metrics is essential for successful implementation.
Examples of Variable Compensation in the Workplace
Variable compensation extends beyond salary adjustments. Other incentives, such as flexible work arrangements (e.g., hybrid models, short Fridays, or free birthdays), can be integrated without affecting the core salary.
According to Michael Page’s 2026 Salary Guide, while these flexible work arrangements aren’t the most common (accounting for 37% of companies), they are gaining traction. Meanwhile, 45% of the companies surveyed by PageGroup focus on offering “competitive salaries” as their retention and talent compensation strategy.
Only 9% of employees consider their compensation package “very attractive,” while 34% view it as “attractive” and 29% rate it as “average.” PageGroup emphasizes that the real challenge lies in elevating most employees to higher levels of commitment through equitable compensation and development policies.
Key Considerations for Variable Compensation
Pandapé highlights that aligning organizational objectives with employee compensation models is crucial. Variable plans should be regularly updated, taking into account the likelihood of employees achieving their goals and the company’s financial capabilities.
Examples of variable compensation schemes include annual incentives, team bonuses, recognition programs, discretionary bonuses, and profit-sharing plans (according to Deloitte’s 2025 Private Company Executive Compensation Survey).
Key Questions and Answers
- What is variable compensation? Variable compensation refers to bonuses or performance-based commissions that supplement a fixed salary, allowing companies to adjust payments based on individual or team performance.
- Why is variable compensation becoming more popular? As minimum wage increases put pressure on companies to control costs, variable compensation offers a flexible alternative for rewarding high-performing employees without broadly raising overall expenses.
- What are some examples of variable compensation schemes? Examples include annual incentives, team bonuses, recognition programs, discretionary bonuses, and profit-sharing plans.
- How can companies effectively implement variable compensation? Companies should establish clear performance metrics, design incentive schemes based on these metrics, and regularly update their variable compensation plans to ensure alignment with organizational goals and financial capabilities.
