What is Variable Pay and How is it Calculated?

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.

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.

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.

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.

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.