Variable pay is the number of bonuses, incentives, compensations, or cash compensations given to an employee based on the performance and on the accomplishment of specified criteria. Since it is offered to the employees based on their performance, it is also known as performance pay. Performance pay is included as a part of the CTC structure and is taxable.
Let's understand it better with the help of an example,
Variable pay is offered to the employees for the following prominent reasons;
Employees expect to be recognized for their hard work and dedication. However, since the companies cannot make the changes in the basic pay of the employees, they offer variable compensation based on performance. This enables the employers to retain the employees and prevent them from moving their jobs quickly.
There are situations where the employee exceeds the expectations of the employees. Thus, appreciating the employees for their performance is also necessary. Variable compensation is enabled to appreciate the employees. This also improves the motivation of the employees to meet the organizational goals.
Employees are offered incentives in the form of variable compensation for performing better. It improves the chances of employee retention and encourages them to be dedicated to their organizational goals.
The compensation can boost the employee's morale to meet their financial needs. In addition, by giving incentives/ performance pay, the employees tend to be more productive and enthusiastic about achieving their goals and targets.
There are three kinds such as;
A company gives incentive pay when an employee reaches a particular target in a specific period of time.
A bonus is usually unexpected, and its size depends on the type. For example, an employee can be paid dividends, such as referral, profit-shares, signing, festivals, etc.
Recognition pay can be in cash or by giving recognition to the employees to appreciate them for their exceptional performance.
Yes, variable compensation is included as a part of CTC. As CTC is the addition of all the fixed and variable pay given to the employees, it provides performance pay, annual bonus, and incentives offered to an employee.
There are many different criteria for performance pay that vary from one company to another. However, employers are not mandated to pay the complete variable compensation to the employees. Instead, it depends entirely on the employee's overall performance and other parameters.
The employees are eligible to be paid variable compensation even if they are serving the notice period. However, it also depends upon the rules and policies of the company the employee is working in.
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