Variable compensation
Variable compensation philosophy
Starting January 2025, Nebulab will introduce a variable compensation component aimed at rewarding individual and company-wide performance, aligning with market benchmarks, maintaining a fair and transparent structure, and tying salaries to company performance. This component will be available only if the company meets certain performance thresholds, allowing for budget flexibility: rewarding employees when the company is successful and protecting the company during financially challenging years.
Additionally, the goal is to directly incentivize employees to grow and contribute to the company’s success, fostering a sense of partnership that is common in consulting firms. This approach ties revenues and profitability to individual contributions, reinforcing the idea that employees' growth and performance are key drivers of Nebulab's overall success.
Common rules for variable compensation
Eligibility for the Performance Bonus, the Profit Sharing Program, as well as for band adjustments or promotions, is mutually exclusive within the same fiscal year. Employees who receive a promotion or band adjustment are not eligible for any variable compensation in the same fiscal year. Similarly, employees eligible for the Performance Bonus are excluded from the Profit Sharing Program, and vice versa. These exclusions are in place to ensure fairness in the distribution of rewards and company resources, preventing the concentration of resources on a few individuals.
Example 1: Promotion scenarioJames is a Software Engineer with an annual salary of €50,000 plus benefits. During the year, James received a promotion. Because he was promoted, James is not eligible to receive a bonus during that fiscal year, as promotions and bonuses are mutually exclusive within the same period.
Furthermore, both programs depend on the company's overall performance; if certain company performance thresholds are not met, neither program will be activated.
Another important factor in determining variable compensation is the performance score resulting from the performance review. The performance review assigns a qualitative score—Below Expectations, Meeting Expectations, or Exceeding Expectations—which is then turned into a multiplier (factor) applied to the bonus or profit-sharing target amounts.
The three performance scores are defined as follows:
- Below Expectations: no bonus will be issued.
- Meeting Expectations: the target bonus will be fully issued.
- Exceeding Expectations: the target bonus will be issued with a 20% prize.
Targets are expressed as a percentage of the total rewards and serve as the initial value, which will be adjusted by the performance score.
Variable compensation structure
The variable component will consist of two main programs:
Performance Bonus Program
The Performance Bonus Program is available to all full-time employees. The target bonus amount will be 2% of the employee's annual total rewards amount, with the total budget being 50% of the available budget for the compensation cycle (see Budget allocation). The bonus will be awarded based on a performance matrix, where, for example, "Exceeds Expectations" receives the target bonus +20%. The target is the initial value, and the final bonus amount is adjusted based on the performance score multiplier. The distribution will be paid annually in April.
Example 2: Performance bonusMaria is a Senior Software Engineer with an annual salary of €65,000. In her performance review, Maria received a score of 3, which means she exceeded expectations but she's still not ready for a promotion. Her bonus target is set at 2% of her salary, which equates to €1,300. Since her performance score was "Exceeding Expectations," Maria receives the full target bonus of €1,560, which will be paid in April of the same year.
Profit Sharing Program
The Profit Sharing Program is available to employees with at least two years of company tenure and falls under the Staff and Principal engineer roles. The profit-sharing pool will have a total budget of 20% of the available budget for the compensation cycle, and the individual target will be 7% of the employee's annual total rewards amount. Similar to the Performance Bonus Program, the payout depends on the performance score, where, for example, "Exceeds Expectations" receives the target bonus +20%. The target is the initial value, and the final profit-sharing amount is adjusted based on the performance score multiplier. The distribution will be paid annually in April following the financial close.
Example 3: Profit sharingElena is a Staff Software Engineer earning €70,000 annually. In her performance review, Elena received a score of 2, which indicates that she met expectations. Her profit-sharing target is 7% of her salary, which amounts to €4,900. Since Elena's performance score was "Meeting Expectations," she receives the full profit-sharing amount of €4,900, which will be paid in April.
Budget allocation
Budgeting for variable compensation is part of the broader compensation review budgeting process. The entire budget will be 10%-15% of the company's profit before taxes, with a minimum threshold of 5% profit margin for band adjustments and promotions, and 10% profit margin for activating variable compensation packages.
Example 4: Budgeting
Consider a scenario where Nebulab has €3 million in revenue and €350,000 in profit, which represents a profit margin of 11.6%. Since this profit margin exceeds both the 5% and 10% thresholds, all elements of the compensation plan—including promotions, band alignment, and variable compensation—are activated.
This approach aligns compensation with the company's financial health, ensuring flexibility to reward employees while also prioritizing promotions and band adjustments, which helps ensure fairness by reflecting an accurate market value for each role. We aim to divide the available budget by following these guidelines:
- Band adjustments: 5% - minimum 5% profit margin
- Promotion ratio: 25% - minimum 5% profit margin
- Bonus ratio: 40% - minimum 10% profit margin
- Profit sharing ratio: 30% - minimum 10% profit margin
These ratios serve as guidelines for how the total budget should be split among different purposes. The exact allocation may vary depending on the specific needs and decisions made during the salary review session.
Rebalancing factor
When the budget allows, the programs will be executed as originally planned. However, if the budget is not sufficient to fully fund the programs as described, a rebalancing factor will be applied. This factor is calculated as the percentage by which the program's total exceeds the available budget. For example, if after the compensation review there are €50,000 worth of programs but only €40,000 available in the budget, the rebalancing factor is calculated as the deficit percentage: (40,000 - 50,000) / 50,000 = -20%. This means all payouts that would have been issued under a fully funded budget are reduced by 20%. The rebalancing factor ensures the company's financial health is maintained while keeping the overall model intact, proportionally reducing only the size of the payouts.
Example 5: Rebalance an overbudgetRafael is a Senior Designer with an annual salary of €60,000. After the compensation review, Rafael's performance bonus target was calculated to be €1,200. However, due to a 20% overbudget, the rebalancing factor applied for that fiscal year was -20%. This means Rafael's payout was reduced by 20%, resulting in a final payout of €1,000.
Flowchart
The variable compensation mechanism involves complex dynamics, which can feel overwhelming initially. To make this easier to understand, the following flowchart visually represents how the variable compensation process works. It illustrates key elements such as the decision-making process, eligibility criteria, and the rebalancing mechanism.
