Variable compensation is the part of the employee’s pay that can change, unlike the fixed pay component. It includes bonuses, commissions, various cash compensation, and incentives and is given according to the performance of the employee. Variable pay is given to employees based on the business objectives they achieve. On the other hand, the base salary of an employee remains fixed, regardless of whether they achieve the additional goals.
Variable pay is decided according to the overall performance of the employee, considering multiple merits. It is generally a percentage of the employee’s fixed pay. The employees are typically paid for the success of their team, company, or their own. Variable compensation can be given in advance as incentives, or in the form of a bonus after achieving an objective. Many employers tend to compensate their employees with variable pay, which can be in the form of money, stock, or even paid time off from work.
Variable pay is generally a part of fixed wages. Employers offer their employees variable compensation based on the performance of a person, team, or even the business as a whole. Some employees have greater chances of receiving variable pay, such as those in leadership and sales roles.
Let us understand the basics of fixed and variable pay and the importance of both. Fixed pay is the amount of salary that remains fixed and is paid to an employee at the end of every month. On the other hand, variable pay is the incentive that is paid to the employees and can be monetary or non-monetary. It is given to employees on the basis of their performance in the month. Variable allowance is used to recognize and reward the contribution of the employees towards productivity and profitability above their normal job requirements.
The main difference is in the way the variable pay scheme is implemented in the company. Non-exempt employees will not usually be paid more than exempt employees. Executive variable pay is tied to the performance of the organisation. Variable compensation is designed to reward the employees’ performance, encourage employee retention, and improve the levels of employee satisfaction. Unlike fixed pay, it plays a crucial role in motivating employees to perform better than before
Variable compensation offers many benefits for a business –
There are various kinds of variable compensation. However, all of them are directly or indirectly related to the performance of the employees.
Variable pay imparts many benefits, such as motivating and retaining employees. It serves as a means for employees to earn extra when they meet and surpass their targets. Employees today look for more than just a base salary when they search for jobs and finally decide to work for a company. In present times, it is no longer enough for any company to provide the same benefits to all the employees. People are expecting to get a comprehensive benefits package that is customised according to their unique needs. For the creation of a personalised benefits package, employers should have a proper understanding of what their employees want the most. The employees are more likely to feel motivated and appreciated if the benefits are flexible and offer variety.
Variable compensation is an incentive scheme that is being provided by a number of employers. From a bird’s eye view, variable pay is a part of the compensation that an employer will pay to an employee according to his performance or the result of his work. The amount of pay will vary on the employees’ performance and targets achieved. Variable compensation is subject to conditions that are pre-determined and is directly proportional to the level of productivity. It will also differ according to the job, the experience of the employees, and the policies of the company.
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