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Variable Pay

Publication: The Economic Times Mumbai;Date: Aug 17, 2012;Section: Career & Business;Page: 10

Variable Pay
Variable pay, also known as performance pay, is used to recognise and
reward employee contribution above and beyond their normal job
requirements, towards company productivity, profitability, quality and
the like. Sreeradha D Basu explains:
WHAT IS VARIABLE PAY?
Variable pay is often based on two main factors:
your own performance and your companys
performance. So, most schemes evolved by companies have a target-setting and actual payout based on that combination.
Variable pay is one of the five main components of total rewards in any organisation, and is usually a percentage of fixed pay. The
other components include fixed pay (salary and all cash allowances), retirals (mostly, statutory and pension-related such as PF,
gratuity), benefits and perquisites (leaves, medical, car, insurance, etc) and Esops (mainly, stock options and restricted stock units
or RSUs).
WHAT ARE THE 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 arent 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.
HOW DO COMPANIES USE IT?
Variable pay has
become an
increasingly popular mode of compensation in most companies. This is more so in the increasingly competitive business
environment, where companies are looking 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.
HOW HAS VARIABLE PAY EVOLVED IN INDIA?
Variable pay started gaining importance in the Indian market in the last decade. Largely a Western concept, it came into Asia and
emerging markets like India and China, migrating with the MNCs. But Indian companies are now progressing on a par with the West,
since the best part about variable pay is that its performance-linked. Even PSUs are now moving towards it though the percentage
there is typically not as high.
WHICH SECTORS ARE HIGH ON VARIABLE PAY?
Financial services, FMCG, FMCD and healthcare are sectors which are very high on variable pay though other sectors are also
following suit.
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