Organizations struggle with how best to structure pay in the ever-changing world of employee compensation to motivate, retain, and attract talent. Deciding between Fixed Pay and Variable Pay is one of the age-old problems that businesses face. Although fixed pay offers consistency, variable pay adds a performance-based component. To assist organizations in finding the ideal balance in their compensation strategies, we will examine the nuances of both Fixed Pay and Variable Pay in this article.
What is Fixed Pay?
The set amount of money that an employer gives staff members in return for their dedication and hard work is known as fixed pay. It may come in the form of an hourly wage or a monthly salary. Basic pay and extra allowances like HRA, DA, and conveyance allowance may be included in the fixed compensation.
Features of Fixed Pay
- Regardless of their performance, an employee would always receive the same amount.
- The employee can feel secure knowing that they will at least make this amount because it is guaranteed.
- Fixed pay can occasionally cause employees to become unmotivated. Both high and low performers receive their base pay under fixed pay.
- As a result of not receiving recognition for their efforts, high performers become disinclined to put in more effort.
- Only if an employee has taken unpaid leave or caused harm to the business (such as breaking an appliance or causing a loss for the company) will they not be paid their regular salary.
What is Variable Pay?
Employees who receive variable pay typically receive commissions or bonuses for their performance. Because this type of pay is directly correlated with employees’ performance, it is also known as incentive or performance-linked compensation. These days, employers offer stock benefits and profit-sharing as part of their variable pay plans to recognize and thank devoted workers for their outstanding contributions to the expansion of the business.
Features of Variable Pay
- Employees receive this incentive based on how well they perform.
- This is a variable compensation, with the amount determined by the employee’s performance in meeting goals and generating profits for the business.
- The job with the most variable pay structure in India is sales. where the fixed-to-variable pay ratio is 60:40.
- The fixed-to-variable pay ratio for non-sale jobs is 80:20.
- An employee with variable pay is highly motivated because their performance will directly increase their incentive.
Is variable pay part of CTC?
Does CTC include variable compensation? All of a company’s fixed and variable employee compensation is referred to as CTC or Cost to the Company. This could include financial incentives that you qualify for, annual bonuses, and performance bonuses.
What is total fixed pay in salary?
The set sum of money that an employer gives its workers in exchange for services rendered in the form of a set salary is known as fixed pay. The accrued salary with basic and multiple allowances listed on the salary slip is known as fixed pay. The employees receive the same amount each month.
Difference Between Fixed Pay and Variable Pay
- Performance: Employees receive fixed pay based on the number of working days and hours worked, regardless of whether or not they reach predetermined goals. Only when an employee achieves above-average performance or meets predefined benchmarks is variable pay applicable.
- Elements: Basic pay, house rent, dearness allowance, and special allowance are examples of fixed compensation. Conversely, variable pay consists of profit-sharing, stock benefits, commissions, bonuses, and retention bonuses.
- Security: Employee job security is promoted because they receive a fixed monthly salary. However, there is no benefit to job security with variable pay.
- Obligation: Employers are required to pay set monthly salaries even in situations where profits are slim and finances are precarious. With variable pay, the employer’s obligation to make a payment is contingent upon the employee meeting predetermined goals or benchmarks.
- Income Fluctuations: All employees who work in the same divisions receive the same fixed pay. However, the variable pay may differ from month to month and from employee to employee. For instance, if employee A has received variable pay of Rs 5,000, he might receive Rs 6,000 or Rs 4,000 in the upcoming months, contingent on several variables.
- Productivity: Under fixed pay, workers’ productivity stays constant and is typically disregarded. Variable pay boosts employee motivation, retention, and performance by incentivizing workers to be more efficient and produce better outcomes.
- Frequency: Monthly payments are required for fixed pay or employee compensation. On the other hand, the variable compensation is disbursed on a monthly, quarterly, half-yearly, or annual basis. Therefore, variable pay is flexible and available based on the company’s choice.
In the complex world of pay, both fixed pay and variable pay have benefits and drawbacks. Striking the right balance is a difficult task that requires an in-depth understanding of organizational dynamics, industry norms, and employee expectations. By carefully assessing job roles, industry norms, corporate culture, and individual preferences, businesses can create a remuneration package that not only attracts and retains top talent but also motivates employees to excel in their roles, improving overall organizational performance.