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Home / Money / Personal Finance /  Increase in variable pay stokes fear of uncertain cash flows among employees

As companies struggle to survive and reduce costs amid the covid-19 crisis, a lot of them are changing the pay structures of employees by increasing the variable component linked to performance. Increasing the variable component may result in cost savings for the companies, but may increase uncertainty in terms of cash flow for the employees in the short term. The uncertainty may be higher where the variable component is linked to the performance of the employer’s businesses.

According to the 2020 Workforce and Increment Trends survey conducted by Deloitte Touche Tohmatsu India, which took into account 350 companies across 25 sub-sectors, around 24% of the companies said they are planning to change their pay mix, tilting it more towards variable pay.

“The entire objective of making compensation more variable or performance-linked is to ensure that employee earnings are more closely linked to the fortunes of the organization. To that extent, in some years cash flows may take a hit if the company does not meet targets, whereas in other areas, employees may earn significantly more if the company performs better," said Anandorup Ghose, partner, Deloitte India.

As per experts, at present, variable pay accounts for around 15% of employees’ salaries across various levels but this percentage is likely to go up. “We expect this to gradually trend up to 20% of pay with a larger change happening at senior levels of management and low or no changes at the bottom of the organization," said Ghose.

The trend started a few years ago but has gathered pace post covid. “Organizations have realized that it is important to lower fixed costs and increasing variable pay is a step in that direction. This ensures that the growth, performance and survival of an organization is aligned with employee’s motivation around compensation," said Rituparna Chakraborty, co-founder and executive vice-president, TeamLease Services.

Experts believe that employees at the senior management level are likely to be more affected as their salaries are generally linked to businesses’ performance. “The more senior the role, the higher is the share of variable component. While in the long run, employees will become used to these newer pay structures, in the short term, this is causing a sense of ‘pay loss’ among people," said Pankaj Bansal, chief executive officer and co-founder of PeopleStrong, an HR firm.

Companies are adopting different ways to increase the variable pay. Where there is no increment, a part of the fixed allowances is being shifted to variable pay.

However, most companies are not changing the basic pay. Any change in the basic pay impacts some of the retirement benefits such as Employees’ Provident Fund and gratuity. “Increasing the variable pay has no impact on retirement benefits because those are usually computed as a percentage of basic salary and companies would probably never touch that," said Ghose.

Companies giving increments have given it by way of hiking the variable component. “Immediate impact on the employees’ salary can be seen by way of most increments happening in the form of an increase in variable pay component," said Chakraborty.

However, the impact will not be much for employees if the component is linked to their own performance which can be quantified. “As the performance is linked to quantifiable targets, for employees performing well it will not have any impact," added Chakraborty.

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