Understanding Variable Pay in Compensation Packages: Can Anyone Explain It Clearly?

Hi friends,

Could I get a detailed idea on variable pay in a compensation package? I am confused about it, and so are my fellow students.

Thanks

Variable pay is compensation that is contingent on discretion, performance, or results. Variable pay links employees' earnings to the performance, good or bad, of an organization, department, or unit/section. In a successful period, the potential to earn more could be substantive. However, if performance is poor, the workforce has to take some responsibility for this and ultimately be prepared to face a financial penalty.

The potential to be rewarded well can make variable pay attractive to employees. Employers are also attracted to the concept because of its ability to promote a common interest for improved performance between staff and management.

In the private sector, variable pay is often linked to profit-sharing and share option schemes.

Regards,
P.V.S. RAVINDRA VARMA

Thank you for the response, but my faculty is denying the fact that variable pay is based on employee performance. She tries to convey that variable pay includes HRA and other allowances, which change according to the basic pay and the cost of living in the employee's location.

I would like to know the correct way to address this doubt of mine. I hope you can assist me with this.

Regards,
Kruthi

I advise you to search on Google and collect relevant data to create a presentation for your faculty. Regards, P.V.S. RAVINDRA VARMA. P.S. I'm attaching an article published in Business Finance.

I must agree with Mr. Varma on the definition for variable pay. And I must respectfully disagree with your teacher Kruthi. However, I would like to add a dimension to variable pay that seems to be overlooked by many organizations.

In a layman's language, if a variable pay scheme exists, then a person will get 'extra' money depending on whether he has achieved what he is supposed to achieve & whether the company has done well. Some companies will reward the employee even if the company is not performing, but if the employee is performing. So if, for example, 85% of an employee's package is fixed and 15% variable, and if the employee's monthly salary is 100 Rs (say), then he gets 85 Rs irrespective of whether he worked or not (provided he was present in the office), and the 15 Rs he will get if he achieved his targets.

Now the 15% incentive takes care of 2 things: a) That the targets for the company are achieved b) The employee is motivated to earn more money by doing more work. So if hypothetically, the company has 5000 employees and assuming that all 5000 employees achieve targets (most of them do in real life), then the company pays out 5000 x 15 x 12 = 9 Lakhs per annum as an incentive.

Now the dimension I'm adding is the company can actually save a lot of money here. And the answer lies in the second point I mentioned above which is employee motivation. As per research, not every person is motivated by money. Each employee is motivated by different things. Some people are motivated by more responsibilities, some people are motivated by spending time in social service, some people by verbal congratulation by the CEO, some people by gifts, etc. Some famous models such as Holland's RIASEC model provide a basis for this thought. So if a company identifies the type of employee and designs a variable pay to suit his/her interest, both the company & the employee win!

Regards,

Mathew

Thank you for your nice explanation. Can variable pay be included in the Full and Final (FnF) statement? We have a variable pay system where employees self-evaluate their performance bi-annually in percentage terms. There are no specific questions asked. Recently, a colleague who left the company self-evaluated as a 100% performer. However, his FnF statement did not mention variable pay. The HR Manager explained that "Variable Pay is never mentioned in the FnF statement." Is this correct? He will receive a separate cheque for the variable pay.

Thanks & Regards,
Deep