How Should We Handle a Former Employee's Complaint About Withheld Variable Pay?

Issue with Former Employee's Variable Pay

My name is Suresh, and I work as an HR professional. I am reaching out to address an issue concerning a former employee who held a managerial position for only three months. In our company, we offer two types of salary: fixed and variable.

The problem at hand is that, upon the employee's termination, we settled his full and final payment as per the fixed salary terms without withholding any amount. However, we did not pay the variable salary or incentives due to his poor performance and the discrepancies within the department he managed. Subsequently, the ex-employee lodged a complaint with the district labor officer regarding this matter. The labor officer contacted me seeking an explanation, to which I clarified that we withheld the variable pay due to the individual's underperformance. The officer understood the situation and advised us to resolve the issue internally.

Presently, the employee has threatened to file a written complaint with the labor officer if we do not release his variable pay. I seek advice on the possible actions the company can take or how we can address this issue effectively.

Regards,
Suresh

Understanding Salary and Incentives

As per my understanding, salary means the total remuneration received by the employee for performing the usual work allotted to them as per the terms of the employment contract, whether implied or express. Incentive is something incremental and variable, depending on the individual's additional performance over and above the usual norms.

For example, if an employee takes authorized leave in a month, their performance would certainly be lower than that of another employee with full attendance in the same month. Therefore, splitting up the normal salary fixed in the employment contract into fixed and variable components does not seem to me a good HR practice, though unfortunately, it is followed by many employers during wage hikes.

Though the dispute is beyond the jurisdiction of employment laws applicable to workmen, it is better to settle the issue amicably, as such a situation can arise in the case of the questioner himself.

Regards

Further to what Umakanthan mentioned, please note that many companies have the practice of splitting the CTC into fixed and variable components. While there's nothing inherently wrong with adopting this model in these days of cut-throat competition, not many companies have policies or rules clearly laid out on what constitutes the variable component and what factors affect the payout. Many IT companies, including top-notch ones, never pay the full variable component at the end of the year. They can justify such lower payouts as they have clear norms spelled out, and employees usually don't complain as they are aware of the guidelines.

In your case, it looks like your company doesn’t have such a practice, and hence this manager is able to take advantage of the loophole. It’s better to talk to him to arrive at a via-media solution. That would be better than allowing the issue to drag on. Also, frame the broad guidelines about the Variable Salary Policy so that you preempt a repeat of such situations.

All the best.

Regards, TS