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What is Variable Pay and How is it Calculated?

What Is Variable Pay?

What Are the Types of Variable Pay Plans?

Who Is Eligible to Get Variable Pay?

How to Calculate Variable Pay?

Take a look at the given table to understand how variable pay is calculated. Suppose, a company named ABC Pvt. Ltd. pays an employee named Anish a monthly salary of ₹ 30,000.

Monthly Salary

Fixed Pay

Variable Pay

₹ 30,000

₹ 25,000

₹ 5,000

ABC Pvt. Ltd. announces that the percentage of variable pay will be 80%.

In this case,

Fixed Pay

Variable Pay

Monthly Variable Pay/ Quarterly Variable Pay

₹ 25,000

80% of ₹ 5000 = ₹4000

₹ 4000*1= ₹ 4000 / ₹ 4000*3 = ₹ 12,000

Now, let’s check the advantages and disadvantages of receiving variable pay.

What Are the Advantages & Disadvantages of Variable Pay?

The table underneath explains the pros and cons of receiving variable pay.

Advantages

Disadvantages

An organisation can easily balance and equal the salary of employees.

Offering variable pay increases the managing cost of an organisation

Firms implementing performance-based variable pay can easily motivate their employees.

There can be issues with pay structure implementation if a firm doesn’t specify the criteria and terms to an employee regarding the variable pay.

It improves employee retention as they receive additional funds.

Many organisations are incapable of maintaining the fund back up, leading to the failure of a variable pay plan. It may show a high pay package, but the organisation will pay less.

It allows a firm to link compensation with employee performance and revenue.

This pay won’t be factored into an employee’s annual payment.

Let’s check the difference between fixed and variable pay for a detailed understanding of the salary variants.

What Is the Difference Between Fixed and Variable Pay?

The following table explains the difference between fixed and variable salary structures.

Factors

Fixed Pay

Variable Pay

Purpose

It is a fixed salary that an employee receives at month-end or beginning.

This is a form of incentive offered to an employee for their accomplishment. The amount can vary from firm to firm.

Productivity

The productivity can be high or low depending on the work atmosphere and salary structure.

Employees show higher productivity due to variable pay. Both high and underperforming employees feel motivated to improve due to the rewards.

Retention

Employee retention can fluctuate. It depends on a firm’s pay scale and benefits.

It helps in retaining quality employees for a longer duration.

During crisis

In times of crisis, having a fixed wage will be more beneficial.

During an economic crisis, it is difficult to maintain a variable pay structure.

Hopefully, the above discussion on variable pay and its function has helped you understand the concept. Individuals can consult their employer and enquire about the pay structure. This will help maintain transparency for an extended period.

Frequently Asked Questions