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.
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.
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.
Here’s an example to help you understand how it works.
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.
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 -
Variable Pay = ₹20,000 (2% on ₹10 lakhs)
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 -
Variable Pay = [(2% on ₹10 lakhs) + (5% on ₹10 lakhs)] = ₹20,000 + ₹50,000 = ₹70,000
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.
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.
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%.
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.
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.
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 -
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.
Variable pay and fixed pay are two entirely different components of your CTC. Here’s an overview of the differences between these two.
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 maximize your variable salary as much as possible.
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.
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.
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.
The percentage of variable pay in India can vary significantly across industries and organizations. 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.
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.
