How Are IT Companies Implementing Variable Pay Structures in Today's Market?

Dear Folks,

We are a Japanese-based company working in the IT field. Keeping in view the current market conditions, our management has decided to implement a variable salary structure across the organization.

Could you please send the salary structure with variable pay, including the percentage of variable pay given to each level of employees?

Thanks in advance.

Regards,
Anuradha

Hello everyone,

I found this site to be very interesting and helpful for HR professionals. I have experience in administrative and people management fields. Currently, I am pursuing my SAP in HR module. As a result, I am not familiar with HR terms and policies. Could you please provide me with some important areas that I should cover during my course?

Thank you! :)

You can choose variable allowances suitable for the CTC. First, break up the statutory components like basic (either 50% of gross or 35% of CTC), then HRA (40% of basic), Conveyance (max 800 per month). Later, divide the rest into variable allowances like medical allowance (max 15k per annum), LTA, telephone, special allowance, other/flexible allowance, performance allowance, etc.

The advice is to keep a minimum of suitable components that should also allow employees to benefit.

Hope this gives you some information. If you have any clarifications, please post them, and I will try to reply to them.

Regards,
Anu

Dear Anuradha,

When we divide salary into fixed component and variable component, only the fixed component will have a breakup, and the variable component will be paid to the employees at the end of the year based on their performance. If the total package offered is 6 Lakhs per annum and it is divided on a 70-30 basis, the fixed component will be 4,20,000 and the variable component will be 1,80,000. In this scenario, only the fixed component will have a breakup (4,20,000 should have a breakup as per norms), and the remaining 1,80,000 will be paid at the end of the year based on the respective employee's performance.

The division of the total package into variable and fixed components will be decided by companies based on their requirements. It is essential to communicate this breakup to employees in writing and ensure they acknowledge it.

Hope I cleared your confusion.

Hi Abhiman and Nrpavan,

Thanks a ton! :P Like Pavan mentioned, we are looking for variable pay linked with individual performance incentives and company performance incentives. Can we have both variables in the salary structure, and what should be the percentage of individual performance incentive and company performance incentive?

I understand that the company performance incentive is based on organizational profits at the end of the year. But what is the usual percentage in salary—10%, 20% as per IT industry norms—and how much is the individual performance percentage usually in salary as per the industry?

Are there any legal limitations on giving an employee incentive based on CTC?

Regards,
Anuradha

Hello Sir,

I am Rashmi from Mumbai and I need your help.

Is this statement correct:
HRA will usually be 50% of Basic/DA. This component can be changed based on Management's decision. Can HRA be more than 50% in any cases?

Kindly assist me with the same via email at "rashmi2b@gmail.com".

Dear Anuradha,

We are not an IT industry, but recently in Aug 08, we have restructured our salary based on a study report from a renowned MNC HR consultant. See if this helps. First, decide on the CTC of each employee. Then factor it in as follows:

1. Basic: Basic 25% of CTC

2. Housing: HRA 50% of Basic (Ref IT - to permit max benefit)

3. Cash Emoluments:
- CCA 50% of Basic
- Conveyance 800/- p.m. (Ref IT - 9600/- p.m. exempted)
- Medical (Gradewise 15000/- to 22000/- - Ref IT 15000/- reimb)
- LTA One month 'Total Fixed Pay' once in a Block of two years
- Food Coupons (Gradewise Rs.2000/- p.m. to Rs.4000/- p.m.)

4. Total Cash = 1 + 3 (Basic + Cash Emoluments)

5. Variable Pay (Special Allowance) = Balancing Figure with respect to TFP (CTC - Retirals) (8-7)

6. Fixed Pay = Total Cash + HRA + Variable Pay (2 + 4 + 5)

7. Retirals (Employer Contribution):
- Provident Fund (@ 12% of basic)
- Gratuity (@ 4.83% of basic) factor only if extending the benefit and depositing with respective authorities

8. Total Fixed Pay (CTC) = Fixed Pay + Retirals (6 + 7a + 7b)

So decide on CTC, Calculate Basic, Calculate Retirals, Arrive at Fixed Pay (CTC - Retirals), Calculate remaining components, Arrive at Variable pay (Balancing figure i.e. TFP - Basic - Housing - Cash Emoluments). Fit in Excel, and it will be easy to understand.

Regards,

Pari

Hi Anuradha,

What percentage of Fixed CTC you want to pay as variable pay depends upon Company Compensation philosophy. Ideally at the lower levels where the employee is only an individual contributor, there doesn't need to be any variable pay, and you can add this amount to his fixed CTC so that he gets more cash in hand, whereas at the middle and senior management levels, you can start from 10% to 20% of their fixed CTC as their variable pay and link it to the company achieving its target. That means an employee will get variable pay only if the company achieves its target, and then you keep weightages for their individual performance also. Like 100% amount of variable pay for employees who get rating 1, 80% for Rating 2, 50% for rating 3, and 0% for non-performing employees.

Hope this will help.

Thanks,
Sakshi

Upon reading your email, I noticed that your organization already has a pay structure in place and you are now considering introducing variable pay. Introducing variable pay in a new company is much easier than in an old one. An old company already has its salary structure established, and implementing variable pay may lead to dissatisfaction among the employees as it could potentially decrease their monthly income if a raise is not considered. Alternatively, it may result in resignations due to the changes.

There are some important factors to keep in mind: whether management aims to retain the best employees, retain individuals from specific positions or departments, or reduce overhead expenses without concern for turnover. Additionally, it is crucial to note that variable pay for each department, level, or position should be distinct and based on their contributions to the company and the impact of dissatisfaction. Furthermore, the process for claiming variable pay needs to be clarified and specific. For instance, establishing variable pay for the marketing department is simpler than determining it for customer service or software departments.

I have not delved into the percentage or calculations as I see that you already have them in place. I trust the points above will be of assistance to you.

Regards, Sajid