When it comes to employee compensation, organizations have a variety of options to reward their hard-working workforce. There are primarily two types of employee compensation: fixed and variable pay. Fixed salary is a set amount of money that an employee receives on a regular basis regardless of their performance and productivity, while variable pay, also called performance-linked pay, is paid based on the employee’s performance.
Understanding the difference between fixed and variable pay helps employees negotiate their monthly remunerations better, and employers to offer practical pay to their workforce.
Understanding Fixed Pay
Fixed pay represents the predetermined or constant compensation that an employer pays employees in exchange for their service and hard work. It can be either in the form of a monthly salary or an hourly wage. The fixed compensation may include basic pay and additional allowances, including HRA, DA, and conveyance allowance.
Advantages of Fixed Pay
There are several advantages of fixed salary packages offered to employees, such as mentioned below:
- Fixed pay is more predictive in nature than variable pay. Employees can get paid for fixed working hours and not require them to bring office work at home.
- Companies provide a fixed number of paid time off to employees eligible for earning a fixed salary or compensation.
- Employees who work overtime also get overtime pay in addition to their regular compensation.
- The payment system promotes job security among employees. It encourages them to maintain a long-term engagement with the company.
Disadvantages of Fixed Pay
Below are some limitations or disadvantages of fixed pay for organizations and employees:
- Fixed pay can demotivate employees in the absence of performance-linked bonuses.
- Employees must meet predefined benchmarks to get bonuses or other benefits.
- Fixed employee compensation models ignore the employee’s hard work and performance, requiring them to negotiate better on incentives or get promotions.
Understanding Variable Pay
Variable pay is usually given to employees in the form of performance bonuses or commissions. This kind of pay is also called incentive or performance-linked compensation because they are directly related to employees’ performance. Nowadays, companies provide profit-sharing and stock benefits under their variable pay scheme to reward hard-working employees for their unparalleled contribution to the company’s growth.
Advantages of Variable Pay
Variable pay comes with a series of advantages for employees and employers alike. Following are some major benefits of adopting a suitable variable pay strategy.
- Variable pay helps in ensuring maximum employee retention. Employees feel rewarded and appreciated, which develops their loyalty to the company.
- It helps organizations maintain standard salaries among employees based on their contribution to the company’s success.
- These performance-linked benefits help reward those employees who bring outstanding results or work harder than other employees of the same division.
Disadvantages of Variable Pay
Let’s discuss some limitations of variable or incentive-based employee compensation.
- It may create unhealthy competition among the employees.
- Employees can use unethical practices to avail of performance-linked bonuses and benefits.
Difference Between Fixed Pay and Variable Pay
Fixed pay is usually paid to employees based on the number of working hours and days without counting whether they meet the set targets. Variable pay only applies if the employee meets predetermined benchmarks or drives superior results.
Fixed compensation includes basic pay, dearness allowance, house rent, and special allowance. Variable pay, on the other hand, includes bonuses, commissions, retention bonuses, profit sharing, and stock benefits.
Since employees get a predetermined monthly remuneration, it promotes job security among them. At the same time, variable pay offers no job security benefit.
Employers are liable to pay fixed monthly salaries even in cases of limited profit and unstable financial conditions. In the case of variable pay, the employer is only obliged to pay if the employee meets certain standards or targets.
5. Income Fluctuations
The fixed pay remains constant for all employees working in the same divisions. But the variable pay can vary from employee to employee and month to month. For example, if employee A has earned Rs 5,000 as variable pay, in the coming months, he may make Rs 6,000 or Rs 4,000, depending on various factors.
Employees’ productivity remains constant and generally ignored under fixed pay. Variable pay encourages employees to be more productive and drive better results, fueling employee motivation, retention, and performance.
The fixed pay or employee compensation must be paid monthly. In contrast, the variable compensation can be paid monthly, quarterly, half-yearly, or yearly. So, the variable pay is flexible and can be offered according to the company’s decision.
Fixed and variable pay complement each other and help organizations satisfy their workforce with monthly compensation and applicable incentives. Thus, an organization should adopt a dual-employee compensation model to maintain standard pay across the workforce and reward hard-working employees for their exceptional contributions.