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 company's 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 aren't 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 it's performance-linked. Even PSUs are now moving towards it though the percentage there is typically not as high.
More organizations are replacing their annual salary increases and holiday bonuses with pay-for-performance plans. According to HR consulting firm Hewitt Associates, 78% of American companies use some form of variable pay plan to reward employees based on performance with the main incentive of aligning employee actions with corporate goals and objectives.
Sensing the need to retain talent in a tough market, companies across sectors are tying the performance and fortunes of employees with their own, and are attracting mid to-senior-level employees with a substantial hike in variable pay in comparison to fixed pay, without taking a hit on immediate costs.
According to search firms, sectors like e commerce, IT and ITeS, FMCG and consumer durables and pharma have doled out a large part of their pay as variable pay over the past year. "Sectors like e-commerce are witnessing rapid growth and are hiring new people at senior levels.
"If the sectors the companies operate in do not perform well, the company will not perform well, and it becomes difficult to give out increments. Then, variable pay becomes effective for distinguishing the high performers from the rest and retaining them in your company," says Adil Malia, group president(Dt.2012) , human resources, Essar.
For instance, at Essar, high performers this year got variable hikes which were about 25% more than the average performers. Pande feels the situation is starkly different from the pre-slowdown years of 2005-2009 , when companies were hiring left, right and centre, and were not worried about parity issues .
"Now they are holding every individual accountable for performance and are then looking at their variable pay. The days of random mass hiring are gone, and the hike in salary only comes into effect at the end of the quarter or year," he feels.