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All about Variable Compensation

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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.

What is Variable Pay?                     

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.

Who will get Variable Compensation?

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.

What are the Differences Between Fixed Pay and Variable Pay in the Salary Structure?

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.

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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

What are the benefits of variable compensation?

variable compensation

Variable compensation offers many benefits for a business –

  • Variable compensation can help in aligning the organisation with change management and meeting the desired outcomes with the selection of the right goals and KPIs.
  • The relevant goals for the variable compensation pay out can drive sales behaviour. This will motivate the employees to deliver in accordance with the strategic goals.
  • Variable compensation is a proven method for achieving higher productivity as well as profitability. Employees are motivated to do something extra, and variable pay is an incentive for effective performance. It is also an integrated part of the business model that helps organisations achieve their business goals faster. This, in turn, leads to a strong brand reputation and improves employee satisfaction.
  • Variable compensation is an essential component of talent management which empowers the organisation to attract some of the best talents in the market.
  • Employees want to be valued and often need confirmation that they are doing the right things. The setting of demanding but realistic targets will motivate the employees to achieve more through a variable pay structure.

Kinds of Variable Compensation

There are various kinds of variable compensation. However, all of them are directly or indirectly related to the performance of the employees.

  • Performance Pay – A financial reward given to the employees that is linked to the individual, team, or company’s performance directly.
  • Bonuses – Variable compensation in the form of a cash lump sum given in relation to the performance of an employee, team, and organisation.
  • Pay at Risk – In this case, the employees will give up a proportion of their base pay, which is fixed, or an increase in the base pay to get higher pay levels based on the performance of the If performance goals have not been met, the base pay of the employee will be reduced.
  • Individual Performance Pay – An increase in the base pay or a cash bonus given to the individual for his or her performance.
  • Merit Pay – An increase in the individual base pay through an appraisal of the individual performance.
  • Profit-sharing Schemes – A proportion of a company’s profit is shared with the employees in this structure.
  • Pay for Contribution – Rewarding important individuals and teams in the achievement of business goals.
  • Competency Pay – Competency is the knowledge and skills of an individual that will contribute to their performance. After the identification of the competencies, the employees will be compensated based on their demonstration of these defined competencies.
  • Gainsharing Schemes – These are bonus schemes that will share a fixed proportion of any performance gains that are made above an agreed level. The greater the level of performance, the greater the gain for both the company and its employees.

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Why Should Employers Offer Variable Pay and Benefits?

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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