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Performance linked problem: Underestimating variable pay

Performance linked problem: Underestimating variable pay

Although 15% of Reetesh's annual package is variable, he takes the amount as a given and uses it for investments, while the fixed pay is used to meet regular expenses.

When Reetesh Mishra agreed to his salary structure before starting a new job, about 15% of the annual package was in the form of variable pay, linked to the company’s performance. So far, Mishra has received this amount in full. But he knows that if the company goes through a bad year, the amount could be far less than 15%. So though he has faced no problem so far, he does not include this amount when he draws up his annual budget. He keeps the variable pay component as a saving for the down payment of a new house that he is likely to buy in the future.

But what if his company goes through a really bad patch and the variable component becomes extremely small? His investments and plans for a new home will take a hit. And chances are that most companies will go through a bad phase. According to initial research findings by Mercer, a global HR consultancy firm, the financial services industry (excluding life insurance) is going to be affected the most after MNCs, banks, retail, real estate and BPOs.

Also, rising inflation and input costs could drive the companies to revisit their budgets for salary hikes. According to a Hewitt Associates’ study, while the average salary increase was 15.1% in 2007, it dipped to 14.8% in 2008 and is likely to fall to 13.9% in 2009.

“The variable portion of the salary is based on three factors—individual performance, departmental performance and company performance,” says P. Senthil Kumar, director, HR and Administration, Cairn India .

It’s the last that might prove to be a real problem. For no fault of yours, you could be paid little if the company falters due to, say, macro-economic factors. Lesser variable pay coupled with a higher rate of inflation could be a double whammy for you.

Reetesh Mishra, 32

Although 15% of his annual package is variable, he takes the amount as a given and uses it for investments, while the fixed pay is used to meet regular expenses.

SOLUTIONS

• Structure your salary in such a way that the variable component is not so large as to curb your spending or investment plans.

• Improve your performance and productivity so that the company does better. This means your pay will not take a hit.

• Opt for variable pay based on individual performance, not one that is linked to company’s performance, if there is such an option.

HOW MUCH IS VARIABLE?
The proportion of variable pay across key industries in 2008
IndustryVariable component (%)
Chemicals10-20
Consumers9-23
Hi-tech4-32
ITeS18-23
Manufacturing9-19
Pharmaceuticals11-17
Others12-31
Source: Mercer — All Industry Total Remuneration Survey, 2008

 

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