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Understanding Your Salary: CTC vs In-Hand

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Let's help you clarify what variable pay means, the effect it has on your salary and why employers choose to have this scheme at work.

Everything You Need To Know About Variable Pay In Your Salary

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"Everything You Need To Know About Variable Pay In Your Salary"

Pranav Karnad

Daily lessons in finance, a.k.a how to live it up without losing it

<p>Does your salary include a variable pay component? If you answered yes to that question, you might be a tad bit unsure about how this variable part of your salary works. Today, we’ll help bring more clarity to this subject and decode what variable salary means.</p><h2><strong>What is Variable Pay in Your CTC?&nbsp;</strong></h2><p>The variable pay component in your CTC represents the payments made to you by your employer for contributing to their business growth. Since such payments depend on your performance, variable pay is also referred to as performance-linked pay.</p><p>Variable pay schemes devised by companies usually have goals or targets the employees must meet. Based on the number of goals met, the employee's payout may vary. Companies often set a percentage of the fixed pay applicable to you as the variable pay component.</p><p>Here’s an example to help you understand how it works.</p><p>Let’s say you’re employed as a sales representative in a company. Suppose for every successful sale you make, the company provides a variable pay of 2% of the total sales you make. And if sales exceed ₹10 lakhs, the rate would increase to 5%. Let’s take a look at what your variable pay would be in two different scenarios.</p><h3><strong>Scenario 1: The total sales achieved = ₹10 lakhs&nbsp;</strong></h3><p>In this case, seeing as you’ve made sales worth ₹10 lakhs, you’re entitled to a variable pay of 2% on this amount. This comes up to -</p><p><strong>Variable Pay = ₹20,000 (2% on ₹10 lakhs)&nbsp;</strong></p><h3><strong>Scenario 2: The total sales achieved = ₹20 lakhs&nbsp;</strong></h3><p>In this case, your variable pay rate would be 2% for the first ₹10 lakhs and 5% for the remaining ₹10 lakhs. The variable pay that you’re eligible to get would be -</p><p><strong>Variable Pay = [(2% on ₹10 lakhs) + (5% on ₹10 lakhs)] = ₹20,000 + ₹50,000 = ₹70,000&nbsp;</strong></p><h2><strong>What Are the Different Kinds of Variable Pay?&nbsp;</strong></h2><p>The kind of variable pay offered may vary depending on the organisation and the type of job profile of the employee. There are 5 different kinds of variable pay that employers may offer. Here’s a quick look at what they are.</p><h3>‍ <strong>1. Performance-Based Variable Pay&nbsp;</strong></h3><p>As the name itself suggests, performance-based pay is when an employer decides to reward an employee for meeting or exceeding the set goals and targets. In many cases, employers even award a higher rate based on how quickly or how well the employee has met the target.</p><p>For instance, let’s say that an employee is given 10 days to finish a particular task. The employer could choose to award variable pay at 5% of their fixed pay for completing the task by the said date. If the employee completes the task by the 5th day, the employer could choose to award variable pay at an increased rate of say 10%.</p><h3><strong>2. Profit-Sharing Variable Pay&nbsp;</strong></h3><p>Companies may also choose to base their variable payments on the profits they generate. This is known as profit-sharing variable pay. Such bonus payments to employees may be awarded in the form of cash, an increased contribution to their retirement plans, or through the issue of company stock.</p><h3>‍ <strong>3. Sales Commissions&nbsp;</strong></h3><p>This is one such variable pay scheme that’s very popular. Here, employers reward employees for making a successful sale. The example we saw above in the previous section is a classic case of a company offering sales commissions to its employees.</p><h3>‍ <strong>4. Bonus Payouts&nbsp;</strong></h3><p>Bonus payouts are generally offered to employees when they cross certain milestones, fulfill certain criteria or complete certain tasks. For instance, an employee may be eligible for a bonus payout in the following cases -</p><ul role="list"><li>When they accept a job with a signing bonus</li><li>When they’ve been working for an employer for a certain amount of time</li><li>When they recommend a job candidate who gets hired by their employer</li></ul><h3><strong>5. Differential Pay&nbsp;</strong></h3><p>Differential pay is a kind of variable pay that’s usually awarded to employees for extraordinary working circumstances. For instance, an employer may provide their employees with differential pay for working beyond their regular hours, on holidays, or on night shifts.</p><h2><strong>How Does Variable Pay Differ from Fixed Pay?&nbsp;</strong></h2><p>Variable pay and fixed pay are two entirely different components of your CTC. Here’s an overview of the differences between these two.</p><h2><strong>Conclusion&nbsp;</strong></h2><p>This sums up the fundamental details about what variable salary means and how it works. If your company offers variable pay for your role, get to know how the variable component is calculated. This way, you can take measures to maximise your variable salary as much as possible.</p><h2><strong>Frequently Asked Questions&nbsp;</strong></h2><h3>‍ <strong>1. What is an example of variable pay in salary?&nbsp;</strong></h3><p>Let’s say your company offers variable incentives linked with your sales performance. More specifically, say you are eligible to receive 5% of any sales you execute over the value of ₹10 lakhs.</p><p>Now, during the month, if your sales add up to ₹15 lakhs, you will be eligible for a variable pay of ₹75,000 in addition to your fixed salary.</p><h3><strong>2. Is it good to have variable pay?&nbsp;</strong></h3><p>Yes, variable pay components in salary have their own advantages. It motivates employees to perform better and encourages them in their everyday work. It is also beneficial to the company in the long run because improved employee morale means a better work ethic and environment.</p><h3>3. What percentage of CTC is variable pay?</h3><p>The percentage of variable pay in India can vary significantly across industries and organisations. On average, variable pay can range from 10% to 30% of an employee's total cost to the company (CTC), depending on factors such as job role, performance-based incentives, and company policies. It is important to note that these percentages are approximate and can differ based on specific circumstances.</p><h3>4. What is variable and fixed CTC?</h3><p>Fixed CTC refers to the portion of an employee's salary that remains constant and does not vary based on performance or other factors. Variable CTC, on the other hand, represents the component of an employee's salary that is contingent upon achieving specific targets, goals, or performance metrics, and can vary accordingly.</p>

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