A fixed salary is the reliable bedrock of our income, providing stability and predictability. As the name suggests, a fixed salary is a predetermined amount you get for the services rendered to your employer. But what are the critical components of this crucial element of our compensation package?
In this blog, we will delve into the meaning of fixed salary, fixed salary calculation and how to differentiate fixed and variable pay from total CTC.
Fixed pay or fixed salary is the monthly compensation that the employer pays you, the employee, in lieu of the professional services you provide.
Apart from exceptional circumstances, you are legally entitled to this amount irrespective of other influencing factors such as individual or company performance. The basic pay and any other eligible benefits, such as house rent, transportation, and dearness allowances, are all included in the fixed salary.
The fixed salary is the predominant part of a typical salary structure. It's because larger companies with a longer tenure in the industry tend to have a more balanced salary mix and stable stream of income to sustain the salary liabilities.
The fixed salary may be lower than the variable components, such as stock options, bonuses, and incentives. Growing companies prefer keeping their fixed costs low and are willing to dole out payments when they witness a profit boom.
As you know your monthly cash inflow, a fixed salary offers a higher sense of security. It helps you optimise your budget & factors in monthly expenses, utility bills, EMI payments, etc. It also indicates how much you can start investing in tools such as recurring deposits or SIP to secure your financial future. On the other hand, a fixed salary gets provided irrespective of your performance. It may not be a sufficient motivator for high-performing individuals as they can earn higher with performance-linked incentives.
It makes up 40-50% of the overall fixed salary and influences other components such as HRA (40-50% of basic), DA (25-38% of basic), or PF (12% of basic).
The employer can choose which allowances to pay its employees. Often, the allowances offered are House rent allowance (HRA), Dearness allowance (DA), Conveyance Allowance, Medical Allowance, Special Allowance, etc.
It’s important to note that the calculation of basic wages can vary from one company to another, and there is no universally fixed method. An inverted approach is often used, deducting a percentage of the overall salary and CTC (Cost to Company) to establish the basic wage.
There are several alternative methods for calculating basic pay, including the following two popular formulas:
Here is an example to understand the formulas better:
Consider a salary breakdown for an individual named Ankita.
Now, let's examine the salary details for another person, Raman:
The variable pay component in your CTC represents the payments made to you by your employer for contributing to their business growth. Since such payouts depend on your performance, variable pay is also called performance-linked pay.
Variable pay schemes devised by companies usually have goals or targets the employees must meet. The employee's payout may vary based on the number of goals met. 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 the calculation for variable pay in CTC 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.
Understanding the fixed salary amount from within your CTC helps you plan your finances & effectively negotiate your salary in the future. It is far more than just a monthly paycheck. It is the cornerstone of financial planning, enabling individuals to budget and navigate their expenses confidently.
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No, the CTC is the larger umbrella that your pay falls under. CTC (cost to the company) is the company's total expense for your employment. It includes all the amounts paid to you and the deductions made on your behalf and deposited to the regulatory institution, such as taxes paid to the Income Tax department or the contributions made to the Employee Provident Fund Organisation (EPFO).
CTC represents the company's cost and encompasses all components such as basic pay, direct benefits, indirect perks, variables such as bonuses, incentives, and deductions such as taxes and retirals. CTC is used to express the entire cost incurred by the company for your service. Fixed salary refers to those salary heads that are predetermined by the employer and paid out each month. Typically, these are basic pay, HRA, and some other allowances.
The employer sets the variable part of the salary and can influence factors such as individual performance, company profits, the nature of your role, etc. Variable salary includes sales or performance-linked incentives, commissions, stock options, retention bonuses, etc.
Usually, a fixed salary is determined at the start of employment and remains unchanged unless modifications are made through formal processes such as promotions, job transfers, or annual performance evaluations. However, it is possible to negotiate a higher fixed salary during job offer negotiations or contract renewals based on market conditions, industry standards, or one's qualifications and experience.
