Variable pay refers to a component of an employee's compensation structure that is not fixed and varies based on performance, achievements, or meeting specific targets. This is in contrast to the fixed salary, which is a guaranteed amount paid irrespective of the employee’s performance.
Variable pay is often used as a performance incentive to motivate employees to excel in their roles. It can be awarded as bonuses, profit sharing, performance incentives, sales commissions, or any other type of financial reward that is contingent on specific criteria, metrics, or achievements.
Types of variable pay
- Annual Bonus: Usually paid at the end of the fiscal year, this bonus is contingent upon both the individual's performance and the company's profitability.
- Sales Commissions: Sales professionals often earn a base salary plus a variable component based on the volume of sales or revenue generated.
- Performance Bonus: Paid quarterly or annually, this bonus is based on the achievement of specific performance metrics or objectives.
- Profit Sharing: Some companies distribute a part of the profits among employees based on a pre-defined formula.
- Project Bonuses: These are one-time payments made to employees who contribute to the successful completion of a project.
- Retention Bonuses: These are paid to key employees to incentivize them to stay with the company for a certain period, especially during critical projects or times of change.
- Stock Options or ESOPs (Employee Stock Option Plans): Though not cash, these are often considered a part of the variable compensation and become valuable based on the company’s stock performance.
Is variable pay taxable?
Yes, variable pay is subject to taxation, and the applicable tax rates are in accordance with the Income Tax Act of India.