Know All About Variable Pay

Nowadays, companies or organizations make many decisions or plan to increase their productivity and achieve the company goals. Also, they improve their workplace and work environment for the employees to feel comfortable and happy while working. One of those methods companies use to increase the productivity and performance of employees is variable compensation.

Variable pay, also known as performance pay, is used to recognize and reward employee contributions over and above normal job requirements for a company’s productivity, profitability, quality, etc. The purpose of variable pay is to encourage employees to do more work or perform better than routine work. In this, how and how much the employee has contributed to increasing the company’s productivity, profitability, or quality.

So in this article, we will learn about variable pay and why companies offer salary as variable pay.

What is variable pay?

The variable pay depends on you and your company’s performance. Therefore, most such schemes have the target and the actual payout. It is one of the five essential components of the company’s rewards for its employees. It is a specific percentage of fixed pay. Other reward components include fixed pay (salary and additional cash allowances), retirement (pension-related pay like PF, gratuity), benefits and perks (vacation, medical, car, insurance etc.) and e-sops (mainly stock options or RSU).

Up to 10-15% of the fixed pay can be variable at the junior level. The variable pay and sales incentives range between 30-40% for sales executives. Sales incentive is not declared as variable pay as it is commission. The variable salary ranges between 15-30% at the middle level and 30-50% at the senior level. ESOPs and RSUs are given above the target level as an additional performance incentive at the very senior level.

Content list

Significance of Variable Pay
Why do Companies Offer Variable Pay?
How to Provide Variable Pay?
Should You Offer Variable Pay?
FAQs

Latest updates

According to data from the paisa bazaar, The importance of variable pay in the country started increasing in the last decade. This culture of the West came to Asian countries like India and China through MNCs. Domestic companies are also adopting it like foreign MNCs. Even PSUs are adopting the variable pay concept. However, the number of government companies doing this is minimal. The variable pay is higher in financial services, FMCG, FMCD and healthcare sectors. But this trend is increasing in other sector companies. Financial services, FMCG, FMCD and healthcare, are the sectors that are heavily on variable pay, though other sectors are also following this.

Significance of variable pay

Variable pay is employee compensation that changes. Variable pay is any number of bonuses, incentives, commissions and other cash rewards depending on the performance of the employees. On the other hand, basic pay is fixed and paid even if the employees have met their objectives. Variable pay and basic pay together are known as a pay mix.

Employers often use variable pay to motivate their employees and reward them for their job performance. This is an additional payment that may accompany the salary and may come in the form of an alternative compensation instead of cash. People vary depending on their level of employment, job performance, stage of life, financial goals and reward calculations against personal risk, and how much they are capable of for variable pay.

Why do Companies Offer Variable Pay?

Offering variable pay can give many benefits to the company, and also, there are many reasons to provide variable compensation to employees.

Variable pay has become a prevalent component of salary packages in most companies.
This is all the more important in an environment of tough business competition in which companies are involved in minimizing fixed cost investments and maximizing the use of variable costs.
Variable pay depends on a specific target.
Companies also use it to improve performance culture and attract and retain talent.
This is because talented people emphasise joining companies where they can differentiate based on performance.
Variable pay has become an increasingly popular method of payment in most companies. This is especially true in an increasingly competitive business environment, where companies are looking to reduce their investment in fixed costs and increase the use of variable costs since the latter is paid only based on achieving specific results. .
Companies use variable paychecks to drive performance culture and attract and retain talent because talented people prefer to join different organisations for their performance.
The primary advantage of variable pay programs for employers is that they provide flexibility and allow the organization to reward employees at a profit rather than operating costs.

How to Provide Variable Pay?

There are some things which you should consider while offering variable pay.

Culture of the organization

Make sure the variable pay you define matches the culture of your organization. Companies that have successful plans have a great culture. Variable pay usually does not work in an organizational culture where employees are expected to perform based on their performance.
On the other hand, marketing and sales departments will not function without variable pay. Applying Variable Pay overnight will not do any good; It will not succeed. The organization should get used to the results based on compensation and accept the change.

Simplicity

It is the best thing for getting the job done, so defining a reasonable duration, the correct values, the nature of the work required, etc., will help keep the plan simple. A complicated variable pay scheme is sure to fail. Therefore, they should be easy to understand, measurable and applicable to many participants. In cases where there are ambiguous terms, the manager should explain the details of variable pay to his employee. Exceptional circumstances should be handled as soon as possible so that there is no ambiguity in the future.

Changes and Updates

An ideal variable pay plan is reported once, but if necessary, it is constantly updated to meet the needs of its employees. Things often don’t work out that way when you plan a variable pay. Therefore, the organization should have an edit window in which they can change the variable pay policy whenever necessary. For example, the variable pay policy created in January 2020 is not very useful in August 2020.

In such cases, the payment plan needs to be updated. On the other hand, if the organization sees that the work is going smoothly, it can increase the variable pay bar.

Variable pay should be Flexible

The variable pay plan should be flexible to accommodate the necessary changes when it is created. It’s one thing to update a variable pay plan, but it’s another to be flexible, even if it sounds the same.

Being flexible for variable pay means that if an employee can’t achieve the target due to real reasons like unavailability of product or unforeseen circumstances, your organization should consider what happened and still pay him. Because it will serve as a long-term inspiration for him, and the organization will win his allegiance.

Should You Offer Variable Pay?

Variable pay can be the best way to boost your employee’s performance, and also it will encourage them to work more effectively to get rewards. But also the quality of work can get affected because of this.

Variable pay is part of the compensation that employers pay employees based on their performance or the results of their work. The amount of salary can vary and depends on the employee’s performance and the organization. The organization pays variable compensation in addition to the basic salary. Variable payments are subject to pre-determined terms and are usually linked to productivity. It differs depending on the job, the employees’ experience, and the company’s policies.

Changing compensation plans can lead to competition among coworkers, affecting a healthy work environment. To avoid this, many employers advise employees not to discuss the details of their variable compensation.

To maintain productivity, companies or organizations should offer variable pay to employees. But also, they should take care of the points which can get affected because of the variable compensation.

Conclusion

We can conclude that offering variable pay and disadvantages are many benefits. Companies and employees do not know how much is involved in variable payments. This creates a lot of ambiguity and makes accounting and budgeting tasks more complicated. If variable pay is an essential component of your salary as an employee, you may find it difficult to plan accurately. In many such job roles, employees may rely on factors beyond their control. Variable pay can be a good trick to improve your employees’ performance, but it can also affect the quality of work.

FAQs

Is variable pay mandatory?

Variable compensation is part of your CTC; if you do not meet certain conditions, the company will not be able to pay variable compensation. If you have not met your promotion target or your team has not fulfilled its performance target and objectives, the company is not responsible for paying you for the variable factor mentioned in your job offer. If the company is at a loss, it may also cancel variable compensation for a specified period.

Is variable compensation good?

When you are just starting work, it is advisable to take more houses and negotiate for less variable parts. However, if you are in high-income brackets and want to impact your abilities, negotiating higher variable pay may work.

How much is the variable pay?

In 2020 the variable pay will be 50-55% of CTC. Currently, it makes 40-45% CTC for senior management and 25-30% for junior employees. According to paisa bazaar, the variable salary ranges from 10% to 15% of the fixed salary at the junior level. However, variable pay plus sales incentives can vary from 30% to 40% for employees working in the sales department. Sales incentives are not defined as variable pay because they are commissions.

What are the types of variable compensation plans?

Generally, there are three common types of variable pay plans,

Bonus – A bonus is a one-time payment made to an employee which is not included in their pay rate. The basis of the bonus can be any performance expected of the organization, and the payment schedule can be designed as standard hourly or calculated day work.
Gainsharing – Benefit-sharing or Gainsharing plan is a popular form of the organization-wide variable pay plan. The purpose of gain share is to connect employees to performance measures.
Profit-sharing – This type of sharing is only helpful in a for-profit organization. Another way to connect employees to the organization’s financial success is to share the organization’s profits.

Who gets variable pay?

The employees or people who can get variable pay are as follows,

The types of people attracted to higher amounts of changing wages are your risk-takers; risk-takers are often drawn to sales and leadership roles, roles that chart new areas. Whether sales and leaders perform, or not, or even excel can significantly impact an organisation’s bottom line. So often, combining performance directly with variable pay can often attract top sales professionals and leaders and positively affect organizations.
The spread and type of variable pay may also depend on the organizational level. Institutions often struggle with how much to lower their variable pay plans. That choice will ultimately depend on culture and budget, but it is worth noting what other organizations are doing.