The practice of relating pay to performance has been around for a while. However, what’s new is that the percentage of pay that is related to performance and the way in which the same is structured around different elements of performance.

One of the key elements of this flexible pay plan is the strategy of relating pay to performance. This strategy has been followed by many multinational companies worldwide and consists of the overall pay structure being broken down into elements.

The variable pay would be paid out as a percentage of the complete package, subject to the performance of the employee. For instance, if the employee gets a grade of 3 on a scale of 1 to 5 (with 1 as the highest and 5 and the lowest grade), the variable pay would be 60-70% of the eligible amount and if the employee gets a grade of 2, the variable pay would be 110-120% of the eligible amount. The variable component of the salary is determined according to the performance of the employee.

The international practice is to increase the element of the variable pay more than the hierarchy. This would state that at senior levels of the employee hierarchy, the variable component can be as high as 50-60% of the overall pay.