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The Empuls Glossary

Glossary of Human Resources Management and Employee Benefit Terms

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Variable Compensation

Variable compensation, also known as performance-based pay, the compensation fluctuates based on the goals achieved. It is designed to motivate employees to contribute towards the organization’s success. Variable compensation may be reinforced in various forms, such as stock options, profit sharing, or bonuses.

What is variable compensation?

Variable compensation refers to the portion of an employee’s total compensation based on their performance and specific goals. It rewards or reinforces the employees for the team or individually contributes to the organization’s success. 

Listen, recognize, award, and retain your employees with our Employee engagement software  

What is dual variable compensation?

Dual variable compensation refers to the compensation structure in which employees are eligible for two varied variable pay compensation based on performance metrics. 

In a dual variable compensation system, employees may have a chance to earn bonuses from two different sources, which may be individual performance or team performance. This allows a more comprehensive and balanced approach to reinforce employees.

How to calculate variable compensation?

The formula to calculate variable compensation can vary depending on the specific structure and components of the compensation plan. However, here is a general formula that can be used as a starting point:

Variable Compensation = (Base Salary) + (Performance Multiplier) x (Variable Performance Component)

In this formula:

  • Base Salary: This represents the fixed salary or base pay that an employee receives.
  • Performance Multiplier: This is a factor or percentage that determines the level of performance achieved by the employee. It is often based on predefined performance targets or metrics.
  • Variable Performance Component: This refers to the specific component or components of performance that are considered for variable compensation. It could include factors such as sales revenue, customer satisfaction scores, individual or team performance metrics, or any other measurable criteria.

The performance multiplier is typically applied to the variable performance component to calculate the additional compensation amount that is earned based on performance. The resulting variable compensation is then added to the base salary to determine the total compensation for the period.

How does variable compensation work?

Variable compensation works by allowing employees to earn additional pay based on their performance.

 Here’s how variable compensation work:

  1. Determine the performance metrics
  2.  Specific performance goals
  3. Measuring period
  4. Performance analysis 
  5. Payout calculation
  6. Communication and payments
  1.  Determine the performance metrics: Organizations determine the performance metrics on which variable compensation will be based. These metrics vary on the nature of the jobs.
  2.  Specific performance goals: Performance goals are aligned with the specific objective that employees are required to achieve in order to be eligible for the variable compensation.
  3. Measuring period: Over a specific period, performances are measured, which may be monthly, quarterly, or yearly.
  4. Performance analysis: The organization assesses each employee’s performance against the established goals. This assessment is based on objective data, which includes performance metrics or sales figures.
  5. Payout calculation: The organization measures the performance of all the eligible employees for variable compensation. The calculation shall apply a predetermined formula, such as achievement performance.
  6. Communication and payments: The amount credited to the employee for variable compensation is communicated transparently.

What is the difference between base salary and variable compensation?

The difference between the base salary and variable compensation on the basis of various components is as follows:

  1. Performance-oriented
  2. Varied components
  3. Factors dependent
  4. Salary determination
  1. Performance-oriented: Base salary is the fixed amount of money that an employee receives. Whereas variable compensation refers to the pay that is reinforced upon achieving a specific outcome.
  2. Varied components: Base salary is paid monthly or annually and remains constant. Variable compensation fluctuated depending on the company’s performance.
  3. Factors dependent: Base salary is paid to employees annually or monthly despite any additional performance. At the same time, an organization is not constrained to pay variable compensation if employees fail to meet the target. 
  4. Salary determination: The amount of base salary is often determined by factors such as job responsibilities and experiences. On the other hand, variable compensation is determined by predefined formulas and percentages.

Fixed vs variable compensation: What is the difference?

Fixed compensation refers to the stable, predetermined amount of money an employee receives regularly, such as a monthly or annual salary. It remains constant over a certain period and is not directly tied to individual or company performance.

Variable compensation, on the other hand, is the portion of an employee's compensation that fluctuates based on performance. It is contingent upon achieving specific performance goals, targets, or metrics and can take the form of bonuses, commissions, profit-sharing, or equity-based incentives.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.


eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

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