Variable compensation is a compensation package paid to operators based on certain predetermined standards of corporate performance. Variable pay is a combination of short-term and long-term incentives. Operator’s annual salary = basic salary + variable salary; variable salary = cash incentive + short-term incentive + long-term incentive. Long-term incentives are the core of variable compensation. Variable remuneration is derived from the performance principle and risk symmetry principle in management. The performance principle holds that the level of incentives for operators should be related to the performance of the company. The better the performance of the company, the higher the intensity of incentives for operators; the worse the performance of the company, the lower the intensity of incentives for operators. This incentive intensity is quantified as variable pay. The principle of risk symmetry holds that in order to effectively motivate operators, the principle of symmetry between returns and risks must be followed when designing the incentive mechanism for operators. The better the business is run, the higher the risk income of the operator: the worse the business is, the lower the risk income of the operator is, and may even reduce his or her basic salary. This allows operators to bear corresponding risks while receiving returns that are symmetrical to the risks, thereby encouraging operators to boldly innovate, strive to improve performance levels, and maximize shareholder value; at the same time, risk factors constrain operators' short-term behavior.

How to implement variable compensation

All the efforts and contributions of operators and the risks they bear will ultimately be reflected in the company's operating performance. Therefore, the most effective way for business operators to achieve variable compensation is to allow them to have residual claim rights. Because according to the principal-agent theory, the remaining claim rights should be controlled by the party with more information and the ability to bear risks, otherwise the entire principal-agent mechanism cannot operate. The exclusivity of operators' human capital and their substantial control over enterprise operations determine that they should at least partially own the enterprise's residual claim rights. Granting operators residual claim rights solves to a certain extent the contradiction caused by the separation of residual control rights and residual claim rights, making the operator's objective function and the shareholder's objective function as internally consistent as possible, and weakening the operator's opportunism. tend to reduce agency costs.