Types of Variable Pays

Submitted By

- Priyanka Adhangle Trupen Rathod Snehal Wanere

Introduction Variable Pays

Variable pay is compensation that does not become a permanent part of salary and which may vary in amount from period to period. It is a monetary reward paid by an employer to an employee based on the performance or results achieved. Variable pay is used generally to recognize and reward employee contribution towards company productivity, profitability, team work, safety, quality, or some other metric deemed important. It is also Known as Performance Pay. Variable pay is directly tied to some aspect of corporate performance such as profit, revenue, or labor efficiency. Variable pay links results with rewards.

Purpose of variable pay

Common purposes of variable pay include: To reward individual performance, To reward group performance To encourage employees to increase productivity

Forms of variable pay

Common forms of variable pay include: Individual special recognition awards Team or group awards Bonuses On-the-spot awards Group incentive plans

Variable pay public and private sector practice

In the public sector
Variable pay gets little attention Affordability is critical Public perception is important Long-term incentives are lacking Managers typically have limited flexibility.

In the private sector

Variable pay is a hot topic

Competitiveness is critical Public perception is not important Long-term incentives can be found Managers can often manage to budget.

TYPICAL VARIABLE PAY-OUTS ACROSS DIFFERENT LEVELS

At junior level, variable pay ranges from 10% to 15% of fixed pay. For sales people, variable pay plus sales incentives can range from 30% to 40%. Sales incentives aren't defined as variable pay as they are commissions. At middle level, it ranges from 15% to 30% and at senior levels, it is typically between 30% to 50%. At very senior levels, ESOPS and RSUs are also given above target levels as additional performance incentives.

Use of Variable Pay to Organizations

To reduce their investment in fixed costs and increase the use of variable costs, since the latter is paid out only depending on the achievement of certain results. Companies also use variable pay to drive performance culture and even leverage it to attract and retain talent since talented people prefer joining organisations where they will be differentiated for their performance.

SECTORS HIGH ON VARIABLE PAY

Financial services FMCG FMCD Healthcare

Common types of Variable Pays

Profit Share A bonus plan or profit share program is a compensation system in which employees are awarded a share of the company's profits to encourage increased productivity. Incentive Plan An incentive plan is a planned activity designed to motivate an individual to achieve predetermined organizational objectives or KPIs. The payment may be in the form of a bonus, commission or other non-monetary awards such as merchandise and travel.

Commission Plan A commission plan is a type of variable payment plan where the salesperson knows their sales target and how much they will be paid if they reach their sales target. This payment is generally based on a percentage of gross revenue or gross profit. Bonuses A bonus is something paid to you that isn't part of your regular salary. It is an extra form of compensation

How it Works
The variable pay would be paid out as a percentage of the whole subject to the performance of the employee. For instance, if the employee gets a grade of 2 on a scale of 1 to 4, the variable pay would be 70-80% of the eligible amount and if the employee gets a grade of 1, the variable pay would be 120-100% of the eligible amount. Accordingly, the performance of the employee determines the variable component of the salary. The practice is to increase the component of the variable pay higher according to the hierarchy.

Categories of Variable Pay

Individual performance Division performance Company performance

Advantages of Variable Pay

It makes the company stronger, more competitive, able to survive and prosper in the months and years ahead. It drives the value of the company by educating people, not with formal training programs but through the work they do every day on the job. It gives them the tools they need to make and understand decisions. It provides them with business knowledge they can use to enhance their own standard of living and job security as they're making a measurable difference to the company as a whole. better way to attract, retain, and motivate employees,

IT firms like Infosys, Wipro and TCS cut variable pay

Information technology (IT) companies may be putting up a brave front but the slowdown has alarmed them enough to make them cut variable pay of staff. Tata Consultancy Services (TCS), which recently evicted Infosys Technologies as the industry bellwether, is said to have made the first move in this regard. HR head and senior vice-president, Infosys Technologies, said since variable pay is linked to performance, it would naturally constitute a lower percentage of the salary during slowdowns.

Conclusion
Using variable pay to recognize organization and employee performance not only can have a positive effect on your employees, but it will also be well received by your executives and shareholders. The highest performing companies with variable pay plans offer greater incentive opportunity, have greater emphasis on communication, developed more accurate goal setting, and maintain realistic goals and targets. Employees are motivated to contribute individually, as a unit, division and finally as part of the whole company.