How Should We Integrate a 10% Variable Bonus into CTC? Seeking Insights on Pros and Cons

Hi seniors,

One of my friend's company is planning to revise their salary structure by removing 10% of the variable component and adding this 10% variable component to the entire CTC. Below is the case I mentioned. Please add your comments and suggestions.

Team,

We are revising our salary structure. Until now, our salary structure consisted of 90% fixed and 10% variable (Bonus Component). Now, we have decided to combine this into 100% CTC, meaning there will be no variable component.

I am seeking suggestions from seniors on how to integrate this 10% variable component as part of CTC. Our appraisals are based on the date of joining, and we cannot afford to wait for another year to address this incrementally. We prefer to make the adjustment in one go.

Please share your thoughts on this, including your opinions on what percentage of the component should be included in the CTC. If we proceed with this adjustment, what would be the negative and positive aspects from both the employer and employee perspectives?

Looking forward to a thorough analysis of this case.

There is no hard and fast rule to regulate such elements of compensation when merging into the fixed salary component. You did not mention your fixed elements of compensation, for example, Basic, HRA, CCA, TA, Medical Allowance, Education Allowance, etc.

The variable component is a performance bonus that is effective from the date of joining. You may use one effective date of 1st April as a new accounting year or with retrospective effect from the 1st January 09 as per your convenience, taking into consideration the mid-term performance review of employees to effect the change.

Merging one variable salary component into the fixed salary is not at all a difficult exercise because that will not reduce the salary. You only have to see whether your statutory deductions on PF, ESIC, and IT shall not add a burden to the salary bill. Further, you must ensure to protect the existing salary and enhance it by adding a variable component to the fixed salary. The only issue will be Income Tax Exemption under certain account heads to be checked to eliminate from the purview of taxable income.

You may also have an opportunity to restructure the entire salary structure to apply some robust rationale and place them into grades and pay bands plus some % of allowance distribution depending on tax exemptions.

Badlu.