What exactly is fixed and variable pay?

Most companies watching market developments are taking a conservative approach to the variable payout to their employees this year. Variable pay spread ranges from 10% to 30%, reveals a survey.
Tuesday, June 26, 2012 10:44:42 AM

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You probably got accustomed to a 80% payout of your variable pay in the past few years but last months salary after the appraisal letter might have taken you by surprise. That payout percentage would have perhaps dwindled to 60%. If you were to analyse your letter closely, you will also find that the variable amount set aside for next year too may have either decreased or increased, depending on the sector youre employed in and your designation. What exactly is fixed and variable pay? Fixed pay is generally decided on the basis of what the person is worth it depends on his or her capability. Based on the market value of the person, companies enhance that payment through a variable pay component that is linked both to the performance of the company and the individual. This enhancement may not be favourable this year, say experts. (Also read: Throwing light on the variable component of salary) Following industry performance, it will be a tough decision on variables this year. This enhancement may not be favourable. Well be taking a call in October, says S Y Siddiqui, chief operating officer (administration), Maruti Suzuki. Xerox India has, on the other hand, moved to a pay structure that has a higher variable component linked to performance. The company has marked out a set percentage as variable pay with most sales employees at a 60% fixed and 40% variable. We have also removed the top stop on the variable. This has helped in rewarding over performance and ensures similar motivation across all pay levels. More importantly, sales people can determine their total earnings themselves through their performance thereby creating an entrepreneurial environment, says Manmohan Kalsy, executive director, HR, Xerox India. According to Thiruvengadam P, leader, human capital advisory services, Deloitte, the variable pay across industries has mostly remained the same or reduced compared to last year. The variable pay has remained constant at 16%. At Deloitte we understand that the clients are being watchful of market developments and most of them have taken a conservative perspective to the variable payout to their employees, he says. The Compensation Trends Survey 2012 Deloitte Human Capital Advisory Services reveals that the variable pay spread ranges from 10% to 30%, especially at the middle and senior management levels, and has shown a considerable decrease as compared to 2011 -2012. Variable pay has reduced the most (across all industries) for top management by 2.5 percentage points. Also, the higher payout is expected to be at 30% as compared to 41% last year. The report also points out that the financial sector is moving towards a more fixed pay structure. This is because in the wake of the recent financial crisis, the FSI sector is under scrutiny for its reward practices deemed to be endorsing higher risk taking behaviour. This sector has been heavily impacted by the increased regulatory

influence. Thus this sector is gradually moving towards a greater balance of fixed and variable pay, says Thiruvengadam P. Yet another school of thought believes that some companies may be looking at increasing the variable component this year due to the pressure on the economy. In todays economic scenario, companies prefer to not keep fixed costs high in order to ensure that their ability to pay is more in sync with the economic environment rather than getting stuck at a fixed level. Variable pay components are particularly high for the technology and the consumer goods sector this year, points out Navnit Singh, partner at executive search firm Heidrick & Struggles. (Also read: Know more about the components of your CTC) Variable Pay Trends

The average variable pay across all industries is 16% Variable pay across industries has mostly remained the same or reduced as compared to last year The exception to this is the manufacturing sector where the variable pay has significantly increased Information Technology, ITeS, energy and resources, infrastructure and real estate, media and advertising are paying the same variable pay at median levels in 2012 as they did in 2011 Consumer business and retail has shown a marginal increase in variable pay as compared to last year In the financial services sector, there is a clear indication of companies moving to a more fixed pay structure with less dependence on the variable pay Vandana Ramnani Source: Shine Jobs/Hindustan Times

Know more about the components of your CTC

What is it that you should look for in a CTC to maximise your take home salary? Let us look at certain salary components that enjoy tax exemptions and can help you get the most out of your earnings.
Thursday, December 22, 2011 9:44:55 AM

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Are you looking for a new job? Are you excited about the offers from various prospective employers? Before you take the plunge, step back for a moment and think - which employer is offering you the best compensation structure? Often times one tends to jump at an offer of a higher Cost to Company (CTC) structure. However, a higher CTC does not always mean a higher cash inflow for you. The way your compensation is structured can have a vast impact on the taxes that you pay on your salary, thereby impacting your net salary payment. What is it that you should look for in a CTC to maximise your take home salary? Let us look at certain salary components that enjoy tax exemptions and can help you get the most out of your earnings: House rent allowance: If you are living in a rented accommodation and are paying rent in excess of 10% of your salary, having a house rent allowance as a part of your CTC can help you save a significant amount of tax. You should submit the rent receipts / rent agreement to your employer to reduce the taxes deducted on your monthly salary.

Leave travel allowance: An allowance received in respect of travel expenses for two holiday trips in a block of four years to any place in India for yourself, spouse, children and dependent parents and siblings is exempt from tax, subject to certain conditions. Telephone reimbursements: While a fixed monthly telephone allowance is fully taxable, if the employer reimburses telephone expenses incurred by you for both, official as well as personal purposes, such reimbursement will not be chargeable to tax. Medical reimbursements: Reimbursement of medical expenses upto R15,000 annually in respect of medical expenses incurred for yourself, your spouse, children and dependent parents and siblings is exempt from tax. However, if the employer pays you a fixed monthly medical allowance, no such exemption will be available. In addition to salary, allowances and reimbursements, employers also provide employees with certain benefits in kind which are valued as per the income tax rules and taxed as perquisites. Having certain benefits-in-kind as a part of your compensation package can also help you minimise your taxes. Let us examine a few of such tax efficient perquisites: Company provided car: Under the Income tax rules, the taxable value of a chauffeur driven car provided by the employer for partly for official and partly for personal use, with the maintenance and fuel costs being borne by the employer, is a maximum sum of R3,300 per month even though the actual expenses including the drivers salary and the lease rent paid by the employer may add up to much larger amount. Club membership: A club membership is a much sought after perk today. No tax is payable by you on the initial fee paid by your employer for a corporate membership of a club that allows you and your family to enjoy the facility. Contribution to superannuation fund: Contributions made by your employer for you to an approved superannuation fund are not taxable if the contributions do not exceed R1,00,000 annually. (Also read: Understanding components of your salary) Health insurance premiums: Health insurance premiums paid by your employer to keep in force an insurance on your health is tax exempt. Free meals: Free food, non-alcoholic beverages, tea and snacks provided by the employer in the office during working hours is not taxable in your hands as a perquisite. Meal coupons: Meal vouchers not exceeding R50 per meal, provided by the employer are not chargeable to tax. So, before you sign your contract with the new employer, do consider negotiating your salary structure with the HR basis the above salary components to save taxes and maximise your net take-home pay. (Also read: Throwing light on the variable component of salary)

Throwing light on the variable component of salary

The concept of a variable component being part of the overall CTC is not new. Nevertheless, one needs to understand this segment of pay package to be clear on the amount that one draws home every month.
Monday, May 24, 2010 10:59:03 AM

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According to a survey conducted by the global HR consultancy Mercer, salary hikes will be steepest for Indian companies in the Asia region. 65 percent of the 233 companies that were part of the survey plan to raise their executives salaries, but before you leap with joy you might want to consider just which component of the salary is gaining more weight. Simply put, your salary is a cumulative figure that consists of two parts- a fixed component and a variable component. But have you lately taken a closer look at how your salary adds in your bank account every month? The salary maths actually is not very simple and there are many components that make your salary. A heavier such component is the variable component, also reffered to as the Variable Performance Component. An annual pay out component, this badly eats up your take home share. Heres more on the variable component. Okay now why the variable component? The concept originated somewhere in the 1980s to allow employees take home a bonus amount as a function of their performance, which is a mutually beneficial concept for both the company and the employees - the latter feel motivated to put in extra efforts and the former benefit by an overall increase in the organisations productivity. Dividing the salary into fixed and variable sections has another advantage - this one tilts more in favour of the company. By including a large variable pay component, companies are able to make an attractive offer to the candidates for a given job as it increases the overall CTC package for the candidate, even if a portion of it is subject to conditions like performance and reimbursements. Also, being exempted from income tax, a variable component in form of reimbursements comes across as a form of saving for the employee. Some companies even offer performance bonus that is more than hundred percent of the variable component, giving a chance for employees to earn more than their CTC. However, the catch with this salary component is that in case you leave the company before the financial year ends, you have to forgo this amount. Performance-based incentives like bonuses upon meeting deadlines or achievement/exceeding of targets serve as a motivating factor that drives employees to deliver more than what their basic job description requires and also gives them a reason to stay with the company for long tenures. And finally, what is the fixed-variable ratio? As a thumb rule, the fixed to variable pay ratio is directly proportional to an employees job role, and is a quantifiable amount of his/her contribution towards the growth of the company. It is generally seen that the variable percentage of CTC increases as one moves higher in the organisations hierarchy. From the candidates point of view, it is advised that they study the salary break up in its entirety and understand the exact amount they will be taking home each month and not get lured by the CTC figure. The variable payout will see its way into your salary account only upon fulfilment of certain conditions or realisation of performancebased goals.

Variable pay packages have become a norm in the corporate world; so if you are in the process of negotiating salary for a job, it is advised that you fully understand the breakup of your salary and understand what will be your effective take home be and whether or not it is in line with your expectations.

Understanding components of your salary

Certain components of your salary inflate your CTC, but you do not get them as part of your monthly pay. You need to understand all components separately to realise impact on your net salary.
Friday, May 29, 2009 4:01:57 PM

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When Ananya landed a new job that promised a 50% hike over her existing cost-to-company (CTC), she was thrilled. She planned to buy a new car and new furniture for her house. But, she had to put these plans on hold after seeing her first months salary slip. There was'nt a huge difference between her previously earned salary and the new one. Let me explain why this happened. Most of us do not understand that there is a big difference between CTC, gross salary and net salary in-hand. People end up thinking that a hike on CTC as shown on the offer letter will increase the in-hand salary, realising their mistake only when they receive the pay cheque. There are various components of CTC that affect your inhand salary. Some of these components inflate your CTC but you do not get them as a part of your monthly pay. Then, there are taxes that cause further leaks in your salary. You should consider all these components separately to understand the impact these will have on your in-hand salary before deciding to take up that seemingly alluring offer. Some of the major CTC components that have a direct impact on the in-hand salary are mentioned here: Basic Salary: Basic salary is a fixed part of your compensation structure and the complete amount becomes a part of your in-hand salary. Allowances: Apart from basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, leave travel allowance. Some of these allowances are tax free up to a certain limit and some of them are dependant on your actual spending. Claims: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance etc. There is a maximum limit set to these components and are paid when you submit your bills. These are usually tax free. Deductions: A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you do not get them as part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary. Performance linked pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of target, but it forms a part of your CTC, fattening it up. Taxes: Taxes are an unavoidable evil and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter. So, ensure that you calculate your tax liabilities with the new income in accordance with tax policies to figure out the amount you will receive in your pay cheque. Everything that shines is not gold. A good looking salary package may not be as good as you think. Do not accept an offer as soon as you receive it, however attractive it seems. Take time, think over it, research and find

out the actual benefits. Try to negotiate for a more flexible, tax-saving salary structure. A little homework will make sure that you do not have to face expectation failure in terms of salary at your new workplace.