We presently have a fixed and variable salary component and are in the process of conducting our performance management. The total salary, i.e., the fixed and variable portion, is considered a cost to the company. Should the percentage of increment be based on the total CTC of the previous year or on the actual payout, i.e., fixed salary plus the variable portion earned?
Example Scenario
For example, if a person's CTC is 100 with 95 as the fixed portion and 5 as the variable portion, and an increment of 10 is offered, which scenario is correct:
Scenario A - 100 + 10 = 110
Scenario B - 95 + 10 = 105
Tags: performance management, variable salary, cost to the company, variable pay
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Example Scenario
For example, if a person's CTC is 100 with 95 as the fixed portion and 5 as the variable portion, and an increment of 10 is offered, which scenario is correct:
Scenario A - 100 + 10 = 110
Scenario B - 95 + 10 = 105
Tags: performance management, variable salary, cost to the company, variable pay
Acknowledge(0)Amend(0)
When determining the percentage of increment for an employee with a fixed and variable salary component, it is crucial to understand the impact on the employee's total cost to the company (CTC). Here's a practical approach to consider:
🔵 Scenario A: Increment on Total CTC of the Previous Year (100+10=110)
- In this scenario, the increment is calculated based on the total CTC of the previous year, including both fixed and variable components.
- This method ensures that the overall cost to the company increases by the specified increment percentage, taking into account both fixed and variable portions.
- It reflects a holistic approach where the increment affects the total compensation structure of the employee.
🔵 Scenario B: Increment on Actual Payout (95+10=105)
- On the other hand, Scenario B calculates the increment based only on the fixed salary component and the additional increment, excluding the variable portion earned.
- This approach focuses solely on increasing the fixed salary component, potentially leaving the variable portion unaffected by the increment.
- It may result in a lower overall increase in the employee's CTC compared to Scenario A.
⚠️ Choosing the Right Scenario:
- The decision between Scenario A and Scenario B depends on the organization's compensation strategy, performance management objectives, and the intended impact on employees' total compensation.
- If the aim is to align the increment with the total cost to the company and provide a comprehensive raise across all components, Scenario A might be more suitable.
- However, if the focus is on increasing the fixed portion specifically while keeping the variable portion stable, Scenario B could be considered.
🔆 Recommendation:
- It is advisable to communicate transparently with employees regarding the increment calculation methodology to ensure clarity and fairness in the process.
- Consider aligning the chosen scenario with the organization's overall compensation philosophy and performance reward mechanisms for consistency and effectiveness.
In conclusion, the decision between calculating the increment on the total CTC of the previous year or on the actual payout depends on the organization's objectives and compensation strategy. Carefully evaluate the implications of each scenario to make an informed choice that aligns with your company's goals and employee expectations.
From India, Gurugram
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51🔵 Scenario A: Increment on Total CTC of the Previous Year (100+10=110)
- In this scenario, the increment is calculated based on the total CTC of the previous year, including both fixed and variable components.
- This method ensures that the overall cost to the company increases by the specified increment percentage, taking into account both fixed and variable portions.
- It reflects a holistic approach where the increment affects the total compensation structure of the employee.
🔵 Scenario B: Increment on Actual Payout (95+10=105)
- On the other hand, Scenario B calculates the increment based only on the fixed salary component and the additional increment, excluding the variable portion earned.
- This approach focuses solely on increasing the fixed salary component, potentially leaving the variable portion unaffected by the increment.
- It may result in a lower overall increase in the employee's CTC compared to Scenario A.
⚠️ Choosing the Right Scenario:
- The decision between Scenario A and Scenario B depends on the organization's compensation strategy, performance management objectives, and the intended impact on employees' total compensation.
- If the aim is to align the increment with the total cost to the company and provide a comprehensive raise across all components, Scenario A might be more suitable.
- However, if the focus is on increasing the fixed portion specifically while keeping the variable portion stable, Scenario B could be considered.
🔆 Recommendation:
- It is advisable to communicate transparently with employees regarding the increment calculation methodology to ensure clarity and fairness in the process.
- Consider aligning the chosen scenario with the organization's overall compensation philosophy and performance reward mechanisms for consistency and effectiveness.
In conclusion, the decision between calculating the increment on the total CTC of the previous year or on the actual payout depends on the organization's objectives and compensation strategy. Carefully evaluate the implications of each scenario to make an informed choice that aligns with your company's goals and employee expectations.
From India, Gurugram
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VARIABLE PAY.doc
CTC CALCULATION SHEET.xls