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What is a fixed comp? Difference between fixed and variable pay
Fixed compensation provides employees with a stable income and the ability to plan their finances with confidence. For employers, it's a strategic tool that plays a crucial role in attracting, motivating, and retaining top talent.
Understanding how to structure fixed compensation can make a significant difference in building a strong, loyal workforce while ensuring financial sustainability for the company. In this article, we'll break down what fixed compensation is, how it’s calculated, and how it differs from variable pay.
Fixed compensation meaning
It is the fixed component in salary that an employee receives from the employer at the end of each payroll cycle. It guarantees a consistent monthly salary, regardless of hours worked or individual performance. Depending on company policy and the employment agreement, fixed pay may or may not include additional contributions to things like a retirement fund, medical insurance, or allowances for transport, housing, etc.
Components of a fixed salary
The following are the two crucial components of fixed compensation:
- Basic salary
Basic salary typically constitutes 40 to 50% of the total CTC. It significantly impacts other elements like HRA (which is 40 to 50% of the basic salary), DA (ranging from 25-38% of the basic salary), and PF (which comprises 12% of the basic salary).
- Allowances
Employers can decide which allowances to provide their employees. Common allowances include House Rent Allowance (HRA), Dearness Allowance (DA), conveyance allowance, medical allowance and special allowance.
What is the impact of fixed salary on employers?
In smaller companies or startups, the fixed compensation is often lower compared to variable components like stock options, bonuses and incentives. These growing companies prefer to provide additional payments during periods of profitability.
However, in established companies, a fixed salary forms the foundation of the salary structure. These organisations, with a long-standing presence in the industry, usually have a stable income stream and a balanced salary mix, making it easier to sustain salary liabilities.
What are the advantages of a fixed salary for employers?
- Simpler payroll processing
Payroll calculations become more straightforward since the salary amount is constant each month, saving time and reducing errors.
- Employee security
Offering a fixed monthly salary enhances job security for employees, boosting retention and satisfaction rates within your company.
How is fixed pay calculated in CTC?
The calculation of fixed compensation can differ from one company to another, with no universally fixed method. A common approach involves deducting a percentage from the overall salary and CTC (Cost to Company) to determine the fixed wage.
Formula to calculate fixed comp from CTC
Let us say your employee’s monthly CTC is ₹50,000 and the company policy is to allocate 50% of the monthly CTC as the fixed pay.
Fixed salary = 50% of ₹50,000
Here, your employee’s fixed salary would be ₹25,000.
Difference between fixed and variable salary
| Parameters | Fixed salary | Variable salary |
| Definition | It is a fixed amount that employers pay employees every month. | This amount changes based on performance, targets or other specified criteria. |
| Stability | It is credited regardless of individual or company performance. | Depends on the employee’s ability to meet specific targets and the company’s performance. |
| Budgeting | Simplifies financial planning and budgeting for both the employer and employees. | Adds complexity to financial planning due to income variability. |
| Retention strategy | Offers stability, which can be appealing to employees. | Retains employees by offering the potential for higher earnings through improved performance. |
| Goal alignment | Provides a reliable salary without necessarily aligning with company goals. | Encourages employees to align their efforts with company objectives, boosting overall performance and success. |
Learn more about variable salary.
Fixed and variable salary examples
Let us take an example to understand the difference between fixed and variable salaries.
Suppose there is an employee named Rahul who works as a marketing manager at a software development firm. His salary structure includes:
- Fixed salary = ₹50,000 per month
- Variable pay or performance-linked bonus = ₹8,000 for every marketing campaign he completes successfully each quarter.
In Q1, XYZ completes 2 campaigns, and in Q2, he completes 5 campaigns. His variable pay for both the quarters will be:
- Q1 variable pay: 2 campaigns * ₹8,000 = ₹16,000
- Q2 variable pay: 5 campaigns * ₹8,000 = ₹40,000
In this example, you can clearly understand that Rahul’s fixed salary remains constant at ₹50,000 per month. However, his variable pay varies based on his performance.
The bottom line
Fixed compensation is a fundamental aspect of a well-rounded salary structure, providing employees with a steady and predictable income. By understanding how fixed pay operates and how it contrasts with variable salary components, you can better design salary structures that align with your company's goals and employee needs.
For a seamless management of fixed and variable pay, try using Zoho Payroll. With its automatic calculation features, Zoho Payroll helps you efficiently manage the two pay types and run payroll. It simplifies the process and ensures compliance, making your compensation management as smooth as possible.
Frequently asked questions
What is the meaning of a fixed salary?
Fixed pay refers to the set amount of money an employer pays an employee regularly in exchange for their work. This includes the basic salary plus any additional allowances offered by the company. Employees receive this consistent amount every month, regardless of performance or hours worked.
Is PF included in fixed compensation?
No, contributions to provident fund and other statutory deductions are not included in the fixed compensation.
What does fixed annual pay mean?
Fixed annual pay is a set amount of money that an employer provides to an employee on an annual basis. This amount is guaranteed and remains the same regardless of the employee's performance or the company’s financial results.