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.

Employers typically pay employees variable pay for success related to the personal, team, or company performance. Variable compensation can be communicated in advance as an incentive, or presented as a reinforcement or bonus after the fact. Many employers compensate employees with variable pay in the form of cash, stock, or paid time off from work.

At junior level, variable pay ranges from 10% to 15% of the fixed pay. However, for employees working in the sales department, variable pay plus sale incentives can range from 30% to 40%. Sales incentives aren’t defined as variable pay as they are as commissions. 

At the middle level, it ranges from 15% to 30%, and at the senior level, it is typically between 30% to 50%.

The concept of variable pay started gaining importance in the Indian market in the last decade. Typically a western concept, it came into Asia and other emerging markets, migrating with the MNCs. But Indian companies are now progressing on a par with the West since the best part about variable pay is that it’s performance-linked. Even the PSUs are now moving towards it the percentage of variable pay given there is typically not that high.

There is a fair amount of visibility across and within organisations when it comes to who gets variable pay and why. Some jobs more typically receive variable pay. For example, sales roles and leadership roles usually have explicit payout tied to specific deliverables. 

There are both organization-driven and employee-based reasons for this. The prevalence and type of variable pay can also depend on the organizational level. Often organizations struggle with how far down to extend their variable pay plan. The choice ultimately depends on the culture and budget of the organization. For organizations, who provide variable pay, most extend it all the way to non-exempt employees.

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.

There are 3 most common forms of variable pay plans that are in use today are mentioned below:

1. Bonuses

A bonus is a one-time payment to the employee that is not built into his or her pay rate. The basis of the bonus may be any performance desired by the organization, and the payment schedule can be designed like that of the standard hour or measured day work. Some organizations have adapted their merit pay plan to a bonus plan. The base pay of all employees stays the same or increases by a cost-of-living factor. Then the results of the merit pay plan are converted into bonuses that are distributed in various ways, from a lump sum to add to each paycheck. The point, however, is that the bonus is just for the current period and not built into the base pay. 

Besides performance bonuses, there are other types of bonuses that are used by the organizations: Hiring Bonus, Referral Bonus, Spot Bonus, Retention Bonus, Discretionary Bonus, Spot Bonuses, and more.

2. Gain Sharing

This approach rewards outcomes that are direct measures of the success of the organization as opposed to the success of an individual employee. A gain-sharing plan is a popular type of organization-wide variable pay plan. The purpose of gainsharing is to tie the employee to the performance measures. Although clear performance-reward connections can be made in these circumstances, it is difficult to make a performance-effort connection.

3. Profit Sharing

A further option for tying employees to the economic success of the organization is by granting them a share of the profits of the organization. This type of incentive is useful only in a profit-based organization. Profit-sharing may be the oldest form of an organization-wide variable pay plan. They were installed to deal with employee’s grievances over low salaries and to combat the feelings that organizations made huge profits but paid workers very little of the gains. Later the idea of aligning worker and management goals appeared. 

How do you calculate variable pay?

Variable pay is the fixed component of your fixed salary that you will not get monthly, but quarterly or yearly. 

Is Variable Pay mandatory?

Employers are not mandated to pay the full variable pay mentioned in the CTC as it is linked to your performance, your team’s performance, or your company’s profit. The employee is eligible to receive full variable payment only if all the parameters are met. 

Why do employers use Variable Pay?

A primary benefit of variable pay programs for employers is that they provide flexibility and allow the organization to reward employees through profit gain rather than operational expenses. 

Will I get Variable Pay in the notice period?

Annual variable pay (bonus) is given based on the work done and the rating secured during the previous performance year period. As per the different policies laid in this regard, you should be serving the company on the day when the bonus is paid out, irrespective of whether you are in the notice period or not. However, this may vary from one company to another.

What is the most common variable pay for performance?

Overall, the most typical type of variable pay awarded is the individual incentive bonus (67 percent), followed by the spot bonus (39 percent) and employee referral bonus (39 percent). When digging in further, top-performing organizations are less likely to use spot bonuses (32 percent versus 40 percent of typical).