Variable pay is a form of compensation that changes with an employee’s performance or activity, often in addition to a fixed salary. It can include hourly wages, bonuses, and one-time rewards, and is used to incentivize employees and reduce overhead costs for companies.
Remuneration represents payment or compensation given to an individual for general employment or services rendered. Variable pay is a payment method that changes with any given activity. All companies use some form of variable pay to reward employees for a complete job or activity. In some cases, companies may provide variable compensation in addition to fixed salaries, including bonuses. This type of compensation can have a broad definition when taken as part of a company’s total compensation package for different types of employees.
An hourly wage is the most common type of variable compensation given to employees. For every hour worked, a company gives the employee a standard wage. The amount paid per hour to each employee varies based on an employee’s knowledge, skills, and abilities. The market rate for certain types of employment may also affect hourly pay. Overtime can also be part of variable pay, as employees who work a certain number of hours each week will receive higher hourly wages.
Management positions commonly have fixed salaries for the jobs offered by the company. As an added incentive, salaried positions, both managerial and otherwise, may receive a portion of variable compensation. For example, a sales position may offer a small salary to each worker in this department. The compensation package will include an additional payment for each item sold by the individual. The variable pay package allows the worker to increase their salary depending on the work and the effort put into a job.
One-time bonuses or compensation rewards can also be part of a variable compensation package. The bonus or compensation reward may be contingent on performance over a set period of time. Individuals can earn a range of additional compensation depending on their actions and ability to meet objectives. Failure to meet the goal simply means lower pay, hence the variable nature of this pay plan. In many cases, the bonus or compensation reward pays quarterly or annually to the employee.
The purpose of offering variable compensation is twofold. First, companies can reduce their initial costs to hire employees. Lower fixed salaries result in lower overhead costs each month for the business. Second, employees often work harder to achieve pay targets, which benefits both the company and the employee. The most essential part of this compensation package is creating a competitive salary; Failing to do so can create a scenario where people are not willing to work hard for low pay raises.
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