What Is Variable Pay? Why Do Employers Offer Variable Pay?

Variable pay is a type of performance-based employee compensation. Therefore, the variable pay amount keeps changing according to the performance of an employee. Variable pay, along with the base salary and other benefits, makes up the package a potential employee would receive. But what is variable pay exactly? Jump into this article to learn in detail about variable pay. 

What Is Variable Pay?

Variable pay is given to employees in the form of incentives, bonuses, and commissions. The performance of the employee, as well as the performance of the whole organization, influences the variable pay amount. Companies usually provide variable payments according to the process of goal setting. 

Example of Variable Pay

Now that you know “what is variable pay,” check out an example to understand how it works in the real world. Imagine a company has an incentive program above the fixed pay. According to the incentive program, every employee will get 2.5% of the sales they execute. To make employees perform even better, the company declared that the amount will go up to 4% and 7.5% for sales over Rs 15 lakhs and Rs 20 lakhs. 

According to this, any employee completing a sale of Rs 10 lakhs will get Rs 25,000 as variable pay. Similarly, employees completing sales over Rs 15 lakhs will get Rs 60,000 as their variable pay. Meanwhile, employees completing sales over Rs 20 lakhs will get Rs 1,50,000 as variable pay. 

Different Variable Payouts Across Different Levels

The variable pay is usually a certain percentage of the total salary. At the junior level, the variable pay amount is usually 10% to 15% of the basic pay. The variable payouts can increase significantly with promotions of the employee. 

At the mid-level, employees can expect variable payouts of 15% to 30% of their fixed salary. In senior and executive positions, the variable pay amount is around 30% to 50% of the basic pay. 

Different Forms of Variable Pay

The different types of variable payouts are as follows:

• Incentives: Under the incentive plan, particular performance targets are set for a certain period. Employees get payouts when they can meet the performance targets. Some examples of incentives include gain sharing, profit sharing, sales incentives, and stock options. 
• Bonuses: Bonuses are given out for completing particular tasks and fulfilling certain conditions. Some examples of employee bonuses include project and referral bonuses. 
• Recognition: A recognition program has specific guidelines, and awards are given out according to those guidelines. A few examples of recognition include nomination programs, spot awards, and managerial recognition. 

Advantages & Disadvantages of Variable Pay

Some key advantages of variable pay are as follows:

• Variable pay can help with employee retention.
• Variable pay helps balance out the salaries of all employees in an organization
• Performance-based variable payouts reward hard-working and dedicated employees and push them to do better. 
• Organizations can tie up revenue and financial performance to compensation with the help of variable payouts. 

Some of the disadvantages of variable payouts are as follows:

• Organizations often fail to add an equalizer in the variable pay. As a result, the amount seems big, but in reality, it is extremely less. 
• Without accurately defined variable pay criteria, the pay structure won’t be implemented properly. 
• Increasing the variable pay amount could increase the expenses of the organization. 
• Variable pay isn’t considered within the annual compensation of an employee, even if the amount is based on a fixed salary. 

Difference Between Fixed Pay and Variable Pay

Variable pay is different from fixed pay in various aspects. The differences are as follows:

Variable Pay – FAQs

• Is variable pay taxable?

Yes, variable pay falls under the taxable income of an individual. The tax amount you need to pay for your variable payout will depend on your specific income tax slab. 

• Why do employers use variable pay?

Employers give variable payouts to retain employees and motivate them to do better. 

• Is variable pay mandatory?

Variable pay is not mandatory, and it is given to employees when they meet certain conditions. 

• How do you calculate variable pay?

You can calculate the variable payout by deducting the fixed pay from your salary. 

• Will I get Variable Pay in the notice period?

Employees can get variable pay even while serving their notice period. But, you must learn about the specific rules of your organization. 

• What is the most common variable pay for performance?

Bonuses are one of the most common types of variable payouts for performance. 

• Is Variable Compensation Part Of CTC?

The variable compensation received by an employee is a part of their CTC.