Explain how variable and fixed pay elements of the total compensation program work.
When people work for a company, they expect to receive from the company something in return for their efforts. Compensation plan refers to how companies compensate and reward their employees.
The compensation to employees can be broadly divided in two types. The first is monetary compensation, which is also called pay, is their earning from the company to be spent by them as they please. The second is the job facilities provided to them to improve their effectiveness and comfort on the job. These can be provides in physical form such as company car, or as payment of expenses like travel, lodging, dining and entertaining incurred while performing company work.
The pay can have two components. A fixed pay independent of the performance levels of individual or groups of employee, and a variable pay linked to the performance levels. Fixed amount is to satisfy need for income stability, and the variable component is to stimulate and reward greater effort.
The fixed pay may be paid in several different forms and under different names – like basic salary, dearness allowance, city compensatory allowance, and house rent allowance. Here it will be useful to clarify that although dearness allowance varies with the price index, it forms part of fixed component of earning as it is not linked to on the job performance.
The variable pay is also paid by companies under different names like incentive, commission, and bonus. The variable pay can be of different types, and can be linked to different performance indicators such as achievement of sales targets, production levels achieved, and achievement of required targets.