What Is Fixed and Variable Salary? Meaning, Differences and Ways to Calculate Your Salary

As an employee, it’s important to understand the different components of your income statement and one of the most critical terms is “basic salary.” This is the foundation of your earnings, the amount you receive before any adjustments are made for taxes, bonuses, allowances, or other factors.

In India, salary and pension are fundamental rights protected by the Constitution, so it’s essential to have a clear understanding of your basic salary and how it affects your overall compensation package. By taking the time to understand this concept, you can make more informed decisions about your career, negotiate better terms with your employer, and plan for a more secure financial future.

What is Fixed Salary?

Fixed salary is a compensation structure that many companies offer their employees. This type of pay is a guaranteed monthly salary that does not vary based on hours worked or individual performance. It includes basic pay and additional allowances like housing, childcare, or transport. While there are some advantages to this type of pay structure, there are also several disadvantages to consider.

Advantages of Fixed Salary

The advantages of Fixed Salary are:

• Consistency: Employees like the stability of knowing what their paycheck will be each month, which can lead to less financial stress and greater peace of mind.
• Simpler Payroll Processing: With fixed pay, calculating payroll is easier since the amount paid to employees remains the same each month.
• No Need to Calculate Overtime: Fixed pay doesn’t require employers to calculate overtime since employees receive the same amount regardless of hours worked.
• Attracting and Retaining Talent: Including allowances in the fixed pay package can help attract and retain talented employees.

Disadvantages of Fixed Salary

The Disadvantages of Fixed Salary are:

• No Incentive for Better Performance: Since the amount of pay remains the same, fixed pay doesn’t incentivize employees to perform better or work harder.
• Low-performing Colleagues: Employees may become unhappy when they see low-performing colleagues receiving the same pay as high-performing ones.
• Allowances Affecting the Bottom Line: Including allowances in the fixed pay package can affect the employer’s bottom line and profitability.

How to Calculate Fixed Salary?

Employed individuals need to understand that their Fixed pay forms a crucial component of their salary structure, as it serves as the basis for calculating various benefits such as PF and gratuity.

Typically, companies utilize straightforward formulas to determine an employee’s Fixed salary.

Annual Fixed Salary = Monthly Fixed Salary X 12 Months

However, determining the Fixed wage can vary across companies and there is no fixed method to calculate Fixed salary. Generally, a reversed calculation approach is employed where a percentage of the salary and CTC (Cost to Company) is deducted to arrive at the Fixedwage.

Typically, the basic pay constitutes around 40% of the gross income or approximately 50% of an individual’s CTC (Cost to the Company).

Several alternative methods exist for calculating basic pay. One such straightforward formula is:

Basic Salary = Gross Pay- Total Allowances

or

Basic Salary = Percentage of the CTC or Gross Pay

Some examples to get a better idea:

Let’s consider this as a salary chart of a person named Anuj.

Now let’s take this as a salary chart of an individual named Noopur.

Tax on Basic Salary

Basic salary is a crucial component of an employee’s overall compensation package. It is subject to taxation and should ideally not exceed 40% of the cost to the company. While keeping a basic salary low can lead to reduced benefits and allowances, an excessively high basic salary can attract a heavier tax burden for the employee. This is why employers and employees alike must strike a balance and ensure that the basic salary is set at a reasonable level.

Interestingly, the basic salary amount can vary based on the employee’s level of seniority, with junior employees typically receiving a higher basic salary compared to their senior counterparts. Understanding the factors that impact basic salary calculations is essential for both employers and employees to negotiate a fair and equitable compensation package.

What are the Factors Affecting Basic Salary?

1. HR Policies
   The policies established by a company’s HR department can significantly impact the basic salary of its employees. The HR policies can often determine the compensation package an individual receives, and a highly skilled and proficient employee may be eligible for higher compensation than their colleagues at the same level. This is why companies must have transparent and fair HR policies that take into account an employee’s skills, experience, and qualifications when setting their basic salary. By doing so, companies can ensure that they attract and retain the best talent, while also promoting a culture of equity and fairness in the workplace.
2. Company Policies
   When hiring new employees, most companies will typically set a salary bracket and inform candidates of this during the hiring process. This salary bracket is typically based on a variety of factors, including supply and demand, company turnover, and the nature of the product or service being offered. For example, the basic salary offered by an IT firm is likely to be significantly different from that offered by a small content writing firm due to the different demands of the job roles and the industries in which these companies operate. By setting a salary bracket based on these factors, companies can ensure that they are offering competitive compensation packages that are in line with industry standards and that will attract the best talent to their organization.
3. Designation
   An employee’s job designation or title is a critical factor that can significantly impact their basic pay. Generally, individuals with more experience and higher qualifications are entitled to receive a better pay scale than their less-experienced colleagues. Employers often set different pay scales for different job roles or designations, which can vary based on a range of factors, such as the required skill level, level of responsibility, and the demand for the job in the market. By establishing fair and transparent pay scales based on job roles, companies can attract and retain the best talent while also promoting a culture of equity and fairness in the workplace.
4. Location or Country
   Social and economic factors can also significantly contribute to the differences in salary brackets across different regions and countries. For example, the basic salary of an employee in India is likely to be significantly different from that of an employee in Europe due to the differences in the cost of living, tax laws, and economic conditions in these regions. Additionally, factors such as the level of economic development, the demand for certain skills, and the availability of talent can all play a role in determining the salary brackets in different countries and regions. By taking these factors into account, companies can ensure that they are offering competitive compensation packages that reflect the local market conditions and attract the best talent to their organization.
5. Industry or Sector
   The base salary of an individual working in the media sector is likely to differ significantly from that of someone working in a software company. This is because the media sector and the software industry have different job roles and responsibilities, as well as varying levels of demand for talent, which can impact the salary brackets in these fields. For instance, individuals working in the software industry may be required to have highly specialized skills and qualifications that are in high demand, which can result in a higher base salary. On the other hand, individuals working in the media sector may not require the same level of technical expertise but may have to work longer hours or under tighter deadlines, which can also impact their base salary. By understanding the unique demands of different industries, companies can tailor their compensation packages to attract and retain the best talent for their specific needs.

What is the Difference Between Fixed Pay and Variable Pay?

If you ask for a simple explanation about what is fixed and variable salary, we can say that, fixed pay is payable to employees regardless of whether they meet their goals or not. However, variable pay is only paid if employees achieve their goals or targets set by the organization. Let’s deep dive into point-by-point comparison between fixed and variable salary.

FAQs

1. What is Fixed pay?
   Fixed pay is a guaranteed salary or wage that an employee receives on a regular basis, regardless of their performance or the amount of work they put in. It’s typically paid in monthly or weekly installments.
2. Is overtime pay part of the basic salary?
   Overtime pay is not considered a part of an employee’s basic salary but is included in the calculation of their gross salary.
3. Is basic salary taxable?
   The basic salary is always subject to taxation and should not exceed 40% of the total cost to the company. It is important to ensure that the basic salary is not set too low, as this can have a negative impact on the other elements of an employee’s compensation package.
4. Are allowances added to the basic salary taxable?
   Allowances are fixed periodic payments that are paid in addition to an employee’s salary. From an income tax perspective, there are typically three types of allowances: taxable, partially exempt, and fully exempt.
5. Is leave encashment taxable as salary?
   For non-government employees, leave encashment is exempt from the limit prescribed under Income Tax law. Government employees receive leave encashment at the time of retirement, and this payment is exempt from taxes.
6. What happens if the basic pay is low?
   Setting a low basic salary may prevent a company from meeting the minimum wage requirements established by the state government, potentially putting the company at risk of falling below the minimum wage threshold.