What is Variable Pay and How is it Calculated?

varible-pay — (Source: business standard)

Every employee working in a respectable firm wishes to earn a bonus or additional fund over or above the regular pay scale. To fulfil this need of employees, companies extend variable pay.

This is a form of performance pay that rewards and recognises capable employees and their contribution to the firm. A company may assess an individual’s productivity, contribution in profits, experience, quality, eagerness to learn, etc., beyond the regular job.

Keep reading to learn about this salary form and the ways to calculate it.

What Is Variable Pay?

varible pay image — (source : marketing91)

Variable pay is compensation offered to employees based on their performance. Ideally, when an employee achieves the monthly target, he/she receives the applicable variable pay.

This can be in the form of incentive, bonus or commission added with the basic salary. The basic wage remains fixed and is given to an individual regardless of the target achievement.

Hence, the basic salary and variable pay are combined and offered to an employee. This combination is called pay mix.

Variable pay can be any number of commissions, bonuses, incentives and cash rewards. This entirely depends on an employer and an employee’s performance.

Individuals should know that the variable pay also depends on a company’s performance. Hence, if a company suffers a loss, an employee may not receive the applicable bonus.

This is a reason why companies set a target achievement scale and base the payout on the results. Factors such as team performance or project completion can again influence the pay scale.

A company usually informs an employee of his/her achievement and the applicable variable pay. This compensation can be in the form of stock, gifts, cash, paid vacations, etc.

To understand the meaning of variable pay, individuals should learn more about its types or plans.

What Are the Types of Variable Pay Plans?

There are three common types of variable pay, which are as follows.

1. Bonus

This is the standard form of variable pay. Every employee is bound to receive a one-time payment that is above the fixed pay rate.

Ideally, a bonus depends on an employee’s performance expected by an organisation. Some organisations extend merit pay plans. Here the base plan remains fixed or increases by a certain amount.

These companies convert the merit pay plan into bonuses and distribute it in lucrative ways. For instance, one can receive a lump sum amount over their basic pay.

However, this earning will be a one-time deal, not a regular basis. The employees are also obligated to receive unique bonuses, such as retention bonuses, hiring bonuses, spot bonuses, discretionary bonuses, etc.

2. Profit-sharing

Many organisations share their profits with their employees. This ensures that the employees feel a part of the organisation. They would happily contribute to the growth of a company.

However, this form of incentive is applicable for profit-based firms. This is an intelligent way to deal with employees who feel that the company makes a huge profit but doesn’t pay employees appropriately.

3. Success Sharing

This is again an excellent approach to appreciate employees and their hard work. Here the company shares its success with an employee. This variable pay plan ties an employee to their performance scale.

These types of variable pay ensure that every employee receives the respect they deserve and gets duly compensated for their performance.

Understanding these pay types would clear the confusion on what is variable pay in CTC and its eligibility.

Who Is Eligible to Get Variable Pay?

In terms of eligibility, every employee working in a respectable organisation is liable for variable pay. However, the amount would differ according to the job sector and profile.

For instance, an IT employee would receive an explicit payout linked to project management. Comparatively, a content writer may receive variable pay based on the number of content created.

Hence, variable pay is influenced by employee performance and organisational achievement. The company size can again impact the variable pay plan.

For instance, a small company may struggle to pay its employees the basic pay. This leaves no scope for variable pay.

Hence, the variable pay eligibility is fixed by a company depending on their potential to pay. Ideally, non-exempt employees are prone to receive this bonus.

Let’s learn how variable pay is calculated to clear the concept further.

How to Calculate Variable Pay?

Individuals should know that the section fixed package in their employment agreement combines fixed pay and variable pay.

This gives the formula -

Employee package = Variable pay (100-X% of total package) + fixed pay (X% of total package)

Here variable pay is calculated by subtracting a percentage of the total package from 100

Conversely, fixed pay will be a specified percentage of the total package.

Hence, an individual will receive their variable pay once a year or quarter, depending on their company policy.

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	₹ 40001= ₹ 4000 / ₹ 40003 = ₹ 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

All

Does every company offer variable pay?

Variable pay isn’t mandatory to be paid by companies. It depends on an employee's performance.

What is the benefit of variable pay for an organisation?

It allows an organisation to maintain an equal payment and rewarding system for every employee.