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What is variable pay and what affects it?

We decode what comprises variable pay, how it is computed, and how employees should assess the same.

August 31, 2022 / 01:36 PM IST
Most businesses have a goal-setting process that is used to determine variable pay.

Most businesses have a goal-setting process that is used to determine variable pay.

As the news around slashing or deferring variable pay gains momentum, Moneycontrol does a deep dive into various elements that constitute and affect the variable pay of employees.

Simply put, an employee's salary structure may include both fixed and variable components. These include the base salary, allowances, incentives, etc. Variables and incentives may be credited monthly, depending on company policy.

Variable pay encompasses a broader range of payroll components beyond salary and hourly wages, such as sales commissions, which can be a fixed amount per sale, or a percentage of the business earned, explains Daya Prakash, founder of staffing firm TalentOnLease.

That means it is typically paid as an incentive, bonus, or a commission. “It is decided based on the performance of the employee and that of the overall business,” says Prakash.

What impacts variable pay


Most businesses have a goal-setting process that is used to determine variable pay. For instance, in roles where the employee is entitled to receive the PLI (Performance Linked Incentive) based on target achievement, IT firm Mangalam credits it  quarterly.

“PLI is a great factor as the variable pay is something over and above regular compensation and incentivises the employee to be more productive,” says Shrishti Bhandari, ED and CMO at Mangalam Information Technologies.

Furthermore, variable pay may also be tied to the company's performance.

Based on the department or the product line, companies define the weightage of revenues from clients in the variable pay. Thus, the yearly variable pay may vary depending on the revenue generated from clients, she adds.

If the revenue growth loses momentum, the variable pay may get impacted. Hence, this pay is not guaranteed.

Nevertheless, start-ups and tech firms have gone above and beyond traditional salary packages in recent years. Employee stock options (ESOPs) are becoming more popular as more employees seek to benefit from a company's long-term growth, highlights Prakash.

Components of variable pay

Experts say there is no set format in the industry for fixing variable pay. However, Rahul Mehra, co-founder of SaaS platform Roadcast, explains that a stretch target is decided, and variable compensation is decided based on what percentage of the  target is achieved by an employee.

The proportion of variable pay to fixed pay at the entry level is typically between 10-15 percent.

The share of variable pay increases as employees advance in their careers. At the intermediate level, the percentage ranges between 15-30 percent, and at the advanced level, it ranges between 30-50 percent, adds Prakash.

However, there's a catch. In some companies, if an employee has already achieved the yearly target in the first three quarters, she may not receive the variable pay for the final quarter even if she generates significant revenues for the company.

“Hence, the maximum limit also is a factor that affects the yearly variable pay,” cautions Bhandari.

For employees, it is important to be able to calculate their salary. “Decode the base salary without incentives and then move forward from there,” says Shailesh Kumar, founder, CABT Logistics.

“Make sure that you set specific targets and that your variable pay is tied to goals that can be measured accurately and reliably,” he says.
Abhishek Sahu covers HR and Careers at Moneycontrol.
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