What is fixed pay?
Fixed Pay is the fixed amount of money paid by an employer to its employees in exchange for services received in the form of a salary. Fixed Pay is the accrual salary mentioned in the salary slip with basic and multiple allowances. It is the same amount received every month by the employees. The salary structure of an employee usually comprises both fixed and variable elements. The variables and incentives might or might not be credited every month depending on the company’s policy. Fixed pay includes the following elements:
- Basic pay
- DA (Dearness Allowance) – The Dearness Allowance is a calculation on inflation and allowance paid to government employees, public sector employees and pensioners in India, Bangladesh and Pakistan. Dearness Allowance is calculated as a percentage of an Indian citizen’s basic salary to mitigate the impact of inflation on people.
- HRA (House Rent Allowance)
- Conveyance Allowance
- Other special allowances, etc.
Advantages of fixed pay
- Fixed pay is usually associated with more predictability. One can work fixed hours at the workplace and there is no requirement to bring work to home.
- There is a certain flexibility in the schedule. One can work quick errands in the middle of the day, however in terms of work, the same has to be compensated by working for longer the same day, or starting work earlier the next.
- There are a fixed number of vacation days per year, as well as fixed number of sick leaves. Availing these leaves will not cost an employee financially, and therefore there is no guilt attached.
- Some rare companies even offer overtime pay for salaried employees who work past a fixed number of hours – for example, some companies count overtime after 42 or 44 of hours worked per week, after which employees get paid overtime.
Disadvantages of fixed pay
- Employees working under fixed pay are usually under more stress as they have to work a fixed number of hours every week, as compared to someone who is working on the basis of hourly pay.
- Unless you reach certain predetermined benchmarks, one will not be entitled to any bonus as an employee.
- No matter how hard you work, pay is likely to remain the same. Only way of increasing your remuneration would be secure a promotion or negotiate for better incentives.
What is variable pay?
Variable Pay refers to employee remuneration that changes, as opposed to fixed pay. Variable Pay is any number of bonuses, incentives, commissions, and other cash compensation that is dependent on employee performance.
Variable pay is primarily dependent on two factors i.e. the employee’s own performance and the company’s performance. Therefore, 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 organization and is usually a percentage of fixed pay. The main rationale behind variable pay is to incentivise success related to the personal, team, or company performance. Variable compensation can be communicated in advance as an incentive, or presented as a reinforcement or bonus after the fact. Many employers compensate employees with variable pay in the form of cash, stock options, or paid holidays/vacations.
Advantages of variable pay
- One of the primary advantages of variable pay is employee retention. Employees feel rewarded and develop a loyalty towards the organization.
- Variable Pay helps the organization to balance out and equalize the salaries of their employees.
- Performance-based variable pay helps to reward hard-working employees, thereby motivating them to work harder and achieve better outcomes.
- Variable pay allows organizations to tie compensation to revenue and financial performance.
Disadvantages of variable pay
- Most of the companies fail to establish an equalizer in their variable pay. It results in a seemingly high pay package, which turns out very less paid in reality.
- If the criteria for variable pay are not defined accurately, it can result in the improper implementation of the pay structure.
- An increase in variable pay adds to the overall expenses of the organization, bringing down profit margins.
- Variable Pay is not factored into an employee’s annual compensation, although the amount may be based on the employee’s salary.
It is clear that both fixed pay as well as variable pay has its own pros and cons. It ultimately boils down the personal requirements of the employee and what kind remuneration model he or she wishes to work on.
YLCC would like to thank Sachet Labroo for his valuable inputs in this article.
