Difference Between Fixed And Variable Salary
You must have heard about fixed and variable salary but might lack clarity about the difference between the two. A salary structure typically comprises two components: fixed cost-to-company (CTC) and variable CTC.
In this blog, we will dive into the concepts of fixed pay and variable pay, their pros and cons, the difference between fixed and variable salary, and more.
Read along to get further insights about the same.
What is Fixed Salary Meaning
Fixed salary, or fixed pay, is the component of the CTC that refers to the fixed compensation paid out to the employee, regardless of the employee’s productivity or performance.
In other words, it is the fixed amount received by an employee in exchange for work and services. This fixed pay is mentioned in their appointment/offer letter and serves as a core component of the employee’s total compensation package.
The fixed salary of an employee typically contains the basic salary, house rent allowance, conveyance allowance, dearness allowance, or any other relevant allowances.
Advantages of Fixed Pay
There are several benefits to the fixed-pay component of the CTC. These are as follows:
- Fixed pay provides assurance of the monthly income of the employee. The employee can plan his expenses accordingly.
- Fixed pay provides a sense of security and helps the employee maintain a long-term relationship with the company.
- Fixed pay allows the employee to earn additional compensation for the overtime work he/she puts in.
Disadvantages of Fixed Pay
Here are the disadvantages of fixed pay that you need to know:
- As it is fixed, it can sometimes demotivate employees due to the absence of performance-linked bonuses.
- Over time, it can be impacted by the rising rate of inflation in the country.
- Sometimes it does not properly compensate for the hard work and performance of the employee, requiring the employee to negotiate for better variable pay.
What is Variable Salary Meaning
Variable salary typically refers to the compensation paid out to an employee that is directly linked to the person’s performance. Such types of payouts are offered in the form of bonuses or incentives, sometimes referred to as performance-linked benefits.
Moreover, there are several companies that provide their employees with stock ownership of the company in the form of shares. This facility is commonly referred to as an employee stock option plan (ESOP). Some companies call it the employee stock ownership plan.
Advantages of Variable Pay
Listed below are some of the benefits of variable pay:
- The best part of a variable salary is that it rewards the extra effort that you have provided for the company.
- It allows companies to maintain a healthy compensation system for their employees.
- The incentive or the performance-linked benefits help reward hardworking employees and bring out outstanding results.
Disadvantages of Variable Pay
Here are some of the disadvantages of variable salary:
- It might sometimes give rise to unhealthy competition among employees, which could affect the quality of work (product/service).
- Employees can adopt unfair means to boost their performance or productivity to avail themselves of more and more incentives or performance-linked benefits.
Difference Between Fixed Pay and Variable Pay
Let’s understand the difference between fixed pay and variable pay based on the following parameters:
|
Factors Differentiating Fixed Compensation and Variable Compensation |
Fixed Salary |
Variable Salary |
|
Meaning |
A fixed salary refers to the fixed compensation that is paid out to employees, irrespective of their performance or productivity. |
Variable salary refers to the extra compensation that is paid out to employees based on their achievements or performances. |
|
Productivity |
The level of productivity or performance does not affect the fixed pay of an employee. |
The variable payout is directly dependent on the performance or productivity of the employee. |
|
Elements |
The fixed salary typically consists of basic pay, house rent allowances, dearness allowance, or any other special type of allowance. |
Variable pay typically comprises incentives, bonuses, performance-linked benefits, and ESOPs. |
|
Security |
The fixed salary indicates the fixed amount of income that an employee will receive at the end of the month. This provides a sense of security for the employee. |
As the variable pay is not fixed, it does not offer any security to the employee. |
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Summing Up Fixed Pay vs Variable Pay
Hopefully, by now, you will have some clarity on the difference between fixed and variable salary.
Fixed pay refers to the fixed compensation received by the employee, irrespective of his/her performance or productivity. On the other hand, variable pay refers to the additional payout made to reward the extra effort and hard work of the employee.
As an employee, you should conduct proper research and ensure that you receive a compensation package that justifies your efforts.