What Is Variable Pay in CTC: Do Incentives Matter?

July 25, 2023
what is variable pay in ctc

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When you join any organization, you wish that they appreciate your efforts. Isn’t it? Especially when you are performing really well, you expect the company to offer a bonus. In that case, most companies provide variable pay. Now, you may want to know what is variable pay in CTC.  

As per a survey conducted by salary.com, about 77% of organizations are offering variable pay in the form of incentives or bonuses to their employees. Many companies are adopting this policy as a token of appreciation. 

However, there is a stark difference between variable pay and fixed pay. It just depends on your earning potential and performance within the organization. Every person must carefully analyze and understand the difference between the two. This plays an important role in ensuring better salary negotiation.  

The fixed salary that you get is the base salary. A variable salary is an extra amount that you receive. The extra amount that you receive completely depends on your performance. It is important to weigh the options carefully during the salary discussion. In the starting stage, you must discuss the fixed and variable pay of the salary structure.  

What Is Variable Pay in CTC? 

You might as well consider variable pay to be performance-based pay. Variable pay in CTC is the extra amount that you receive as a bonus. While the CTC reflects a fixed amount of variable pay, the amount that you receive will vary. It depends on your performance. Two factors determine the incentive pay: 

1. The company’s performance 

2. Your performance 

Therefore, variable pay means that the scheme can be changed by the company. The company may set targets and provide commission-based pay on the combination. Variable pay is one of the most important constituents of total rewards. It will be for everything that the company offers. The variable pay in CTC might as well be an important percentage of fixed pay.  

The employers provide variable pay to employees based on their performance. It also depends on the success of teams, and personal and company performance. The communication of variable pay to employees is done in the initial stages itself. It can also be presented as incentive pay or commission-based pay. Some companies compensate employees with variable pay as paid time off. Some may also offer it as stock or cash. 

The variable pay depends on company performance. In case the company faces any loss, it will not receive any variable pay. For this reason, the company’s set target achievement and base payout. Different factors will influence it like project completion and team performance.  

If the company meets its goal, the employers will get information about the same. Many companies also turn to giving gifts to employees. The combination of variable pay and basic salary is known as a pay mix.  

Why Do Employers Offer Variable Compensation? 

There are several reasons why employers offer incentive pay. Some of the most prominent ones include: 

Talent Retention 

Many companies investing in employee retention and recognition offer variable compensation. Companies often cannot offer a significant hike in basic pay. Therefore, the employees are always on the lookout for better opportunities. To retain these talented employees, the companies offer variable pay in CTC.  

Through variable pay, the companies provide monetary benefits to the top talents. This acts as an encouragement for these talents to stay in the company for a longer period. If any talented employee wants to leave the company, they may increase the variable pay. The Commission-based pay often encourages the employees to stay in the organization. Their extended stay can help the growth of the company. 

Improving Performance  

Through variable pay, the efforts of employees can be rewarded better. It motivates the employees to improve their productivity and performance. Variable compensation also encourages competitiveness among employees. This helps to maintain a dynamic environment in the workplace. As a result, stagnation reduces.  

Talent Appreciation 

Every employee has a certain set of rules that they must follow. This is to ensure that they can complete their duties. In some cases, the employees will need to complete additional responsibilities and tasks. It will also exceed the expectations of employers. With the help of bonuses and incentives, employers get to encourage the efforts of employees. This will also encourage them to work beyond their fixed duties.  

Morale Booster 

A good incentive pay always boosts the morale of the employees. It will help to meet the financial needs of the employees. Getting an incentive will help to boost the confidence of employees. It also encourages them to do their job in a better way. This helps employees know that the company recognizes their efforts. As a result, they will be motivated to complete their duties better.  

Examples of Variable Pay in CTC 

Employee motivation through variable pay is a major reason for variable pay. However, companies often rely on designing a variable pay plan. Some of the examples of types of variable pay in CTC include the following: 

Incentive Programme 

The employee will get an incentive only if they meet their target within a certain period. The company will decide and convey the same to employees in advance. The employers will need to make the payout above the salary if the employee meets their target.   

Companies often offer travel, holiday packages, and employee discounts for long-term incentive programs. Some of the short-term plans for the incentive program. It may include profit-sharing, sales incentives, or management incentives.  

Bonus 

The most prominent types of bonuses for employee-based pay are numerous. These may include a signing bonus, an annual bonus, and a holiday bonus. The bonus may also include monetary benefit or equity. For reducing operational costs, many companies may also offer higher bonuses.  

However, it will have small figures for the base salary. You can negotiate the salary benefits during the joining time.  

Recognition Programme 

For recognition programs, the companies may offer cash or other forms of recognition. This is mostly because of their exceptional performance. Many companies may identify the talent and nominate the employees for these programs. They may encourage the employees to take part in fellowships, workshops, or sabbaticals.  

Companies may also include employees on their websites. This is also a great way to recognize their efforts.  

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Difference Between Variable Pay and Fixed Pay 

In the table below, we will observe the difference between variable comp and fixed comp.  

Feature Fixed Pay A fixed monthly amount of money that an employee receives.  
Definition A set monthly amount of money that an employee receives.   Fluctuating compensation based on an employee’s performance.  
Stability Offers a consistent income for employees regardless of their performance.  Can be unpredictable as it’s dependent on certain variables like sales and commission.  
Risk Offers little risk as employees are guaranteed a fixed income. Employees can be at risk of earning less if they don’t meet their targets or company earns losses.  
Motivation May not motivate employees to perform better.  Can motivate employees to work harder and achieve better results.  
Budgeting Allows employees to budget their expenses.  This can make it difficult for employees to budget.  
Examples Salary, annual wage, monthly stipend Commissions, bonuses, profit sharing, stock options 

Advantages and Disadvantages of Variable Pay 

Advantages 

Some of the benefits of variable pay include the following: 

1. Variable pay promotes employee retention. 

2. Variable pay helps the company to balance out. This further ensures better equalization for the salary of the employee.  

3. The compensation-based pay encourages hard-working employees. It motivates them to stay in the company for a longer time.  

4. Incentive pay ensures a balance of financial performance and revenue.  

Disadvantages 

Some of the drawbacks of variable pay include the following: 

1. Most companies introduce an equalizer in variable pay. This eventually results in a high pay package. However, in reality, the employee may be paid really less.  

2. It is crucial to clarify the criteria for variable pay in a proper manner. If it is not defined, it can result in an improper pay structure.  

3. Increased variable pay leads to an increase in the cost of the organization.  

4. It is important to identify the variable pay across the employee salary.

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Knowing Your Variable Pay 

As an employee, knowing about every aspect of your monthly salary is not only your right but a necessity too. And variable pay is one such aspect of your paycheck that you earn for your hard work. It’s proof that your hard work is helping the organization earn profits, because of which you are being rewarded.  

To make sure that you get such incentive pay for your work, always ask HR about variable pay before joining the organization.  

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Frequently Asked Questions

Is variable pay included in CTC?  

Yes, variable pay is typically included in an employee’s CTC (cost-to-company) calculation. This is because variable pay is part of an employee’s overall compensation package. It can impact their net pay, taxes, and other benefits.

How do you calculate variable pay? 

Variable pay can be calculated using different methods. It depends on the nature of the variable pay component. Employers may use specific formulas or targets to determine variable pay. This is often outlined in employment contracts or agreements. 

Is Variable Pay Mandatory? 

No, variable pay is not mandatory. Employers can choose whether to offer variable pay to their employees. The terms and conditions of variable pay can vary from company to company, you can discuss these terms before joining any organization during the interview phase.  

Why do employers use Variable Pay? 

Employers use variable pay as a way to incentivize and reward employees for meeting specific performance goals or achieving certain targets. This type of compensation is typically tied to individual or team performance and can be structured in a variety of ways such as bonuses, commissions, or profit-sharing plans. 

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