This blog explains the difference between fixed comp and variable comp, focusing on the fixed compensation meaning and how it compares to variable pay. It breaks down what is fixed and variable salary by detailing fixed compensation components like basic salary, HRA, PF, and benefits, alongside variable compensation elements such as bonuses, commissions, and profit-sharing.
A salary of an employee generally has two components - fixed and variable compensation. Every month, an employee will receive a fixed comp as salary. Variable comp is given based on how they perform and is given at regular intervals (not necessarily monthly).
Your variable component will be defined in your offer letter. Some employees may have it and some may not. The calculation, amount, and payout frequency depend on your role, company policy, and overall performance.
The fixed compensation to variable compensation ratio refers to the proportion of an employee's pay that is fixed versus the proportion that is variable.
There is no one-size-fits-all ratio for fixed to variable compensation, as the appropriate ratio will depend on the specific needs and goals of the company and the employee. Some companies may have a higher ratio of fixed to variable compensation, while others may have a lower ratio.
Some factors that can influence the fixed-to-variable compensation ratio include:
For example, IT services may have a 80:20 ratio (fixed:variable), while sales-heavy industries might work on a 60:40 or even 50:50 split.
Why the ratio matters:
An imbalanced ratio can impact motivation and retention. Too much fixed pay may reduce performance incentives, while too much variable pay can create financial uncertainty for employees. Companies often review and adjust this ratio during annual performance reviews or when restructuring fixed comp and variable comp policies.
In a fixed compensation structure, the employee's pay is based on a set amount that does not change and is not tied to performance or the number of hours worked.
Common Elements are commonly in a fixed compensation structure:
A salary is a fixed amount of money that an employee is paid on a regular basis, typically on a monthly basis. This is also called basic salary. If you have more leaves than you can, you will lose an equivalent amount. For example, if you take 3 days of leave and you can only take 2 in a month, then you will lose a day’s salary from your basic salary.
Tax saving employee benefits are additional perks or advantages that an employee is entitled to as part of their employment in the organization.
Benefits can also include offerings like:
This is not given in terms of money.
Overall, a fixed compensation structure provides a predictable and stable income for an employee. It is common for employees who have a fixed compensation structure to receive a salary as well as benefits.
While the fixed comp is stable, reviewing it during appraisals ensures it stays competitive with industry benchmarks.
Read: Employee benefits in India
A variable compensation structure refers to the way in which an employee's pay is determined and paid out, with the amount of pay varying based on performance, business results or other factors. Unlike fixed compensation, which is stable, variable compensation can change monthly, quarterly, or annually depending on the company’s policy and the employee’s achievements.
There are multiple elements that can be included in a variable compensation structure, including:
Bonuses are additional pay that is given to an employee based on their performance or the company's profits. For example, if a person achieves 100% of their goals for the month, they will get 100% of the bonus. The lesser they achieve, the lesser will be the bonus.
Suggested: Guide on effective performance management
Commission is a percentage of sales that is paid to an employee based on the products or services they sell. For example, let’s assume a company gives 10% commission to employees. If a salesperson closes 5 lac worth of deals for a company in a month then they will receive Rs. 50,000.
HRs or people in Revenue Operations can use a commission tracking software to calculate the variable pay.
Profit-sharing is a portion of the company's profits that is distributed to employees.
Overall, a variable compensation structure provides the potential for additional pay based on the employee's performance or the company's profits. It is common for employees who have a variable compensation structure to receive bonuses, commission, or profit-sharing in addition to base pay or salary.
The right fixed-to-variable compensation ratio depends on the role, sales roles may have a higher variable component, while support or administrative positions may have minimal variable pay.
Fixed Compensation:
Variable Compensation:
Assuming that the salesperson generates a total sales revenue of INR 20,00,000 (INR 2 million) in a month, their variable compensation would be INR 40,000 (2% of INR 20,00,000).
So, the total CTC for this salesperson would be:
The employee gets fixed compensation every month. If the employee makes only 10,00,00 revenue in a particular month, then 2% of it is 20,000. The variable pay he will be receiving is 20,000 for that month. It will change based on how much revenue the employee makes.
Understanding the balance between fixed comp and variable comp is essential for both employers and employees. For employees, knowing this breakdown helps in planning finances and setting realistic earning expectations. For employers, the right mix can boost motivation, retain top talent, and align pay with company goals. The ideal ratio depends on the nature of the job, industry, and business objectives but when designed well, it creates a win-win for both sides.
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