Understanding Variable Pay

Understanding Variable Pay | Benefits, Features, Payment Calculation And Features of Variable Pay

Understanding Variable Pay: The concept of variable pay or variable salary was introduced in India not very long ago. But today, most corporates have adapted to the concept of variable pay and employees working in an organisation are well aware of this concept. People working on the managerial levels in different companies find a part of their salary as variable pay.

Variable pay is that part of the salary offered to an employee based on his/her performance. Therefore, It is also called performance pay. Variable pay is a standard method adopted by corporates to recognise and reward employee’s contributions above and beyond their typical job requirements. Here, in this article, we will understand the concept of variable pay, the breakup of salary and variable pay benefits.

Breakup of Salary

Under a variable pay system, an employee’s salary is broken down into various parts depending on their field of operation. Given below is a standard break down of the salary of an employee:

  • Basic Pay: Basic payor base salary forms the base of the income of an employee. A basic salary is a fixed amount of the compensation package that an employee is offered. Basic salary does not include any gratuities or incentives. The basic pay of an employee strictly depends on his/her work field and designation.
  • Long Term Benefits: The long-term benefits include a contribution to long-term policies for the benefits of the employees. It includes a retirement fund, provident fund and gratuity. A part of pay is deducted and deposited into various schemes by both employer and employee to benefit the employee at a later stage in life.
  • Fringe Benefits or Perquisites: Fringe benefits or perquisites refer to those benefits which an employee enjoys, such as medical coverage, paid leaves, insurance, rent allowances and travelling charges. These benefits come under cashless pay and are primarily offered to employees in the form of allowances.
  • ESOPs: ESOPs stands for Employee Stock Ownership Plans. It is a kind of benefit given to the employees. Here an employee is offered stocks of the company.
  • Variable Pay: At the end of the salary breakdown comes the variable pay. It depends primarily on two factors: the employee’s performance and the company’s performance. Mainly variable pay comprises 20-30% of the total salary.

What is Variable Pay?

Before moving on to the benefits of variable pay, we need to understand the variable pay correctly and what it includes. Variable pay is a part of the compensation that is paid to the employees based on their performance. Most companies adopt the concept of variable pay to reward employees who are hard-working and perform well in their specialised sectors. Variable salary is like an umbrella, under which we can find different types of compensations, including bonuses, commissions, incentives, and other types of cash benefits. Depending on their performance and the sectors in which they are employed, employees are offered different kinds of variable payment methods.

Variable pay mainly depends on the employee’s performance and the company’s performance in which an employee is working. There was a time when variable pay was only limited to marketing and sales sectors, but today it is almost in every sector of the corporate world. Under the variable pay scheme, an employee gets rewarded as per his designation and work. When you climb up in the hierarchy, your basic pay also increases.

Payment Calculation And Features of Variable Pay

The big question is how variable pay is calculated and paid to employees. Most companies consider distributing the performance of their employees as per certain ratings. Based on the performance rating, an employee is entitled to a certain percentage of variable pay. For example, it can be said that an employee with the highest rating can be entitled to 80% of variable pay. In contrast, an employee with an average rating will be entitled to somewhere between 40-50% of variable pay. Given below is an example of a table of rating of performance and percentage of variable pay offered to an employee:

Performance Rating Percentage of Variable Pay
5 80% variable pay
4 70% variable pay
3 60% variable pay
2 50% variable pay
1 30% variable pay

Variable pay is the most adopted payment method by corporates to reward the good performers and punish the inefficient ones. As discussed earlier, variable pay increases as per the designation of the employees. In most corporates, it is observed that, at the junior level, variable pay is 10-15%. Whereas in middle level it ranges between 15-30% and variable pay is approximately 30-50% in the senior level.

Key Features of Variable Pay

  • Variable pay is fixed and shown as a part of the Company’s CTC.
  • Variable pay is taxable as per an individual’s tax slab.
  • Variable pay is entitled based on the performance of an employee
  • The most important feature of variable pay is that if an employee leaves the company before completion of a financial year, he/she has to forgo the amount of variable pay.

Benefits of Variable Pay To The Company

In the past few years, variable pay has gained a lot of popularity among Indian Companies. Today it has become one of the most adopted methods for compensation. So here are some of the benefits of variable pay to the companies:

  • It helps the companies cut down their fixed cost and increase variable costs, which benefits the company on a long-term basis.
  • Most companies adopt the variable pay method to bring about a performance-driven culture. It helps and motivates the employees to perform efficiently.
  • Companies also use to it retain efficient and talented employees.

As we have discussed earlier that variable pay depends on the company’s performance as well. So we can say that if a company does not achieve its financial targets in a year, it may not disburse variable pay or give a significantly lower percentage of variable pay.

Variable Pay Concerning Indian Companies

Variable pay started to gain popularity in India in the last decade only. With the migrating Multinational Companies, it came to India and became one of the most popular compensation methods.

According to the Compensation Trends Survey, conducted in 2012, The Deloitte Human Capital Advisory Services reported that the variable pay spread ranges between 10% to 30%, specifically in the middle and senior management levels. The variable pay gained a lot of popularity in sectors including financial services, Fast Moving Consumer Goods, Fast Moving Consumer Durables and Healthcare. The following are the key points that were revealed in the survey of compensation trends:

  • The average percentage of variable pay across every industry is 16%.
  • The variable pay in most industries has remained the same or has decreased as compared to previous years.
  • Sectors such as Information technology, Energy and resources, Infrastructure and real estate, and marketing and advertisement were paying the same percentage of variable pay.
  • Variable pay in the middle level in 2012 is the same as it was in 2011.
  • Percentage of Variable pay is lower at middle and junior levels as compared to senior level.

In The End…

Variable pay has definitely emerged as one of the important compensation methods in the last few years. It is adopted by most corporates to increase efficiency in the employees and to recognise and reward those with excellent performance. In the future years also more and more companies will adopt the method of variable pay.

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