Understanding Variable Pay

Not long ago, the concept of  Variable Salary hardly existed in India. Today employees, especially at managerial levels, find a part of their compensation depending on the sector, listed as variable pay .Variable pay, also known as performance pay, is used to recognize and reward employee contribution above and beyond their normal job requirements.

What is Variable Pay?

Variable pay is often based on two main factors: your own performance and your company's performance. So, most schemes evolved by companies have a target-setting and actual payout based on that combination. Variable pay is one of the five main components of total rewards in any organization, and is usually a percentage of fixed pay.

Difference between Fixed Pay and Variable Pay in salary structure?

Fixed Pay is what is defined as fixed and you will get the same salary as was mentioned in the offer letter.

Your package= Fixed Pay (X% of total package) + Variable Pay (100-X% of total package).

So variable pay is part of your salary package. You will get your fixed pay at the end of every month but you will get your variable pay once in a quarter/half-year/year (may differ from company to company).

Let us understand this with the help of an example.

Let’s assume that a company is paying variable pay each quarter. Suppose your total monthly salary is Rs. 30,000. Out of which you are getting Rs. 25,000 as fixed pay and Rs. 5,000 as variable pay. So you will always get Rs. 25,000 at the end of each month.

Now let’s suppose that your company announces the percentage of variable pay to be 80%, so you will get 80% of your variable pay which is = Rs. 4,000.

Hence at the end of the quarter you will get: Rs. 4,000 X 3= Rs. 12,000.

 Advantages Disadvantages One of the primary advantages of variable pay is employee retention. Most of the companies fail to establish an equalizer in their variable pay. It results in a seemingly high pay package, which turns out very less paid in reality. Variable Pay helps the organization to balance out and equalize the salaries of their employees. If the criteria for variable pay are not defined accurately, it can result in the improper implementation of the pay structure. Performance-based variable pay helps to reward hard-working employees, thereby motivating them. An increase in variable pay adds to the cost of the organization. Variable pay allows organizations to tie compensation to revenue and financial performance. Variable Pay isn’t factored into an employee’s annual compensation, although the amount may be based on the employee’s salary.

Types of Variable Pay

• Commission: This is a portion of revenue given to the sales employee as part of an official compensation plan.
• Profit-Sharing Plan: This plan gives employees a portion of the company’s quarterly or annual profit in addition to their base salary.
• Bonus: This is an extra lump sum given to employees based on the company’s performance. It’s often an unspecified amount on an annual basis and will vary depending on the year’s results.
• ESOP: This option is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company. They are sometimes offered as an alternative to cash compensation.
• Gratuity: Gratuity is the monetary amount which is payable to the employee of an organization under the Payment of Gratuity Act 1972. This is mainly paid to the employee as a token of appreciation for his/her services towards the company.

Who does and doesn’t get Variable Pay?

When it comes to providing variable pay, many companies have diverse views. As incentives are also measured as a part of variable pay in some companies. For example, the sales and marketing departments get variable pay, Office and admin staff may not have a high component of variable pay. In the current market scenario, variable pay is a huge motivating factor and hence is generally a part of your CTC.

It is important to have a discussion with your employer beforehand to understand their expectations and set your goals right to make the most of the variable pay component.

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