Fixed Pay vs Variable Pay: What Are the Differences?

Fixed and variable pay are common components of an employee's total compensation package. However, both are distinctly designed to offer different benefits and meet various organizational goals and employee needs.

With Salary.com's Data as a Service API, you can now easily determine which compensation structure is suitable for your organization as you integrate with our leading HR-reported compensation data whenever you need it.

Fixed pay vs variable pay meaning

Fixed pay refers to the fixed amount of money that employees earn on a regular basis, usually every month or every week, regardless of how well they or the company is performing. This pay usually includes a base salary along with extra benefits, such as an additional budget for housing, transportation, and allowances.

On the other hand, variable pay is based on how well employees perform at their job, and it can go up or down depending on whether they meet certain goals like sales targets. Examples of this kind of pay include profit-sharing, bonuses, incentives for good work, and commissions for sales made.

Why do companies give fixed pay and variable pay?

Companies offer both fixed and variable compensation to motivate employees, meet employee needs, and improve employee performance. A fixed salary provides financial stability and assures employees that they have the support they need to meet their basic necessities regardless of organizational performance metrics.

Additionally, variable pay structures are designed to encourage employees to work harder and strive for higher results as they are tied to individual or organizational performance. With 74% of disengaged employees actively looking for other jobs, having a well-rounded pay package that includes both fixed and variable pay structures can help your company keep employees motivated and stay competitive in the job market.

With Compensation Data, you can improve your organization's compensation strategy with salary data sets that HR and team managers can use to pay your staff right.

Key differences between fixed vs variable pay

Let's look at the key differences between fixed and variable pay to help you understand which compensation type suits your organization.

Factors that influence compensation type

Here are seven key factors that need to be considered:

1. Industry standards

   Recognize that compensation varies significantly across industries, with high-demand sectors like software companies often offering higher fixed salaries compared to retail or hospitality.

   Benchmark Pay Data continuously blends data from multiple sources to create a competitive, complete, and current market price for any job.

2. Education and experience

   Understand that an employee's education and experience directly impact their fixed compensation structure, as those with advanced degrees and extensive experience typically receive a higher basic salary.

3. Job title and responsibility

   Acknowledge that job titles and responsibilities are critical in determining a fixed and variable salary, with senior positions receiving more compensation than entry-level roles.

   With Search for Jobs, your organization can access a search feature that indexes keywords across job titles, descriptions, competencies, and alternate job titles to find the right price for the right job, every time.

4. Employee performance

   Measure employee performance, as high-performing individuals often receive additional compensation, bonuses, and salary increases that reflect their contributions to the company.

5. Market trends

   Stay informed about the latest market trends to ensure a fixed and variable comp that aligns with industry standards.

6. Location

   Evaluate location, as urban areas often offer higher salaries to match the cost of living.

7. Company culture and values

   Embrace a culture of transparency and fairness, as strong company values can lead to equitable compensation practices.

Disadvantages of fixed pay vs variable pay

Let's go over some of the disadvantages of both pay structures.

FAQs

Let's discuss some frequently asked questions about both pay structures:

Which salary is best, fixed or variable?

The best salary structure depends on the organization's goals and the nature of the work. Fixed salaries can be good for your organization if you aim to provide financial stability and predictability for your employees, while variable compensation is suitable if you want to motivate your employees to perform better by incentivizing them based on their individual performances.

Market Data helps you match, scope, and price jobs quickly and accurately by industry, company size, and geographic location to find the data most relevant to your organization.

Is variable pay cheaper than fixed?

Performance pay can be cheaper since it aligns compensation with performance only. For instance, if a base salary is $50,000 with a potential $10,000 bonus based on meeting targets, the company incurs the additional cost only when performance targets are achieved by the employee.

When should variable compensation be used?

Variable compensation should be implemented when you want to reward employees for achieving specific performance targets or when their contributions directly impact on the company's success. It is particularly effective in sales roles or industries where employee performance can significantly influence revenue generation.