Dear Vandana
I wont dwell here on the base minimum salary that you should pay to your employees based on market conditions and inflation.
Now on the subject of Variable pay many methods are followed will give here a few methods
1. Lumsum
Very traditional method and was followed for very senior executives as Commission but now extended to all categories. Linked always with profit and based on the profit, decide the percentage. For example, your target of profit is say 1 crore and u achieve 75 lakhs, then the commission or bonus payable is only 75% of he agreed amount
Many organisations used to say that the executives are eligible for 100% of their basic as Profit sharing bonus or commission based on the appraisal Then they decide at the end of the year based on Profit he percentage to be paid In any case it wont exceed 100% of agreed amount This is very old conventional but still simple method
2. Lumpsum on appraisal
Organisations every year revise salaries based on market and inflation and here they can not differentiate between employees So they do this exercise every year But they also appraise employees every year and categorywise decide the lumpsum payabale for different rating Here is an example
Grade 1
Rating A Rs 10000 as lumpsum
Rating B Rs 7500 as lumpsum
Rating C Rs 5000 as lumpsum
Grade 2
Rating A Rs 75oo as lumpsum
Rating B Rs 4000 as lumpsum
Rating C Rs 2000 as lumpsum
It goes on This is only illustration and it goes in lakhs
3. Monthly Variable
Som orgnisations mostly IT Companies based on Rating decide the monthly variable amount payable for different levels and sometimes the rule is so flexible, they decide for the individual as well. This is being paid as Variable pay everymonth with the condition that this amount will be withdrawn at the end of the year. This is again like the lumsum but the financial burden is spread over a year And again a with the attrition so high in the Industry they would like to make the payment as long as the employee is in the organisation.
4 Incentives
Mostly Sales people are given this based on target
This is a big subject and this, I hope would have given you some idea.