HRM 961121: Variable Pay vs. Fixed Pay - Compensation Systems

This report provides a comprehensive overview of fixed and variable pay systems within the context of Human Resource Management (HRM). It begins by defining compensation and its significance in HRM, highlighting its impact on recruitment, retention, and profitability. The report then explores the two primary types of compensation: fixed pay and variable pay. For each system, the report outlines the pros and cons, providing a balanced analysis. The fixed pay system, characterized by a standard salary, is examined for its ability to control operational expenses and its role in employee retention, along with its limitations in terms of overtime pay and employee motivation. The variable pay system, which ties compensation to performance, is analyzed for its potential to boost productivity and employee engagement, while also addressing potential drawbacks such as fostering unfair competition and creating uncertainty. The report concludes by providing a bibliography of sources used to support the analysis.

Variable Pay vs. Fixed Pay
HUMAN RESOURCE
MANAGEMENT – 961121
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Variable Pay vs. Fixed Pay
Table of Contents
Compensation or Pay.........................................................................................................3
Types of Pays or Compensations.........................................................................................3
Fixed Pay System..........................................................................................................................3
Variable Pay System.....................................................................................................................4
Bibliography.......................................................................................................................5
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Variable Pay vs. Fixed Pay
Compensation or Pay
Compensation or a pay is defined as the total cash and non-cash payments that an
organisation pays to its employees in exchange for the services that they offer to the company
(Kappel, 2018). Compensation management is an important part of human resource
management as it can have a huge impact on the recruitment, retention strategies and
profitability of a company.
Types of Pays or Compensations
The type of compensation package offered to an employee can vary from one company to
another. In general, two most commonly used compensation types are a fixed pay system and
a variable pay system. A brief insight into the two systems is given below:
Fixed Pay System
A fixed pay system is a system in which business organizations fix a standard salary package,
also known as flat wage or salary, for each employee of its employee. The pros and cons of a
fixed pay system are:
Pros:
- A fixed pay allows business organizations to exercise a greater control over their operational
expenses and to provide a clear-cut budget for compensation programs
- A fixed pay required less supervision over the employees as the managers do not have to
continuously assess the performance of the employees to calculate their wages (Vogt).
- A major advantage of a fixed pay is that it helps in retaining employees during tough
conditions. In tough times, performance in an industry can drop down, which can have an
impact on the employees if they are being paid on the basis of their performance levels
(Mello, 2010).
Cons:
- A major disadvantage of a fixed pay system is that the employees are not eligible for
overtime pay.
- Bringing in extra money can be difficult for the employees (Kramer, 2018)
- A fixed salary kills the scope of motivation amongst the employees
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Variable Pay vs. Fixed Pay
Variable Pay System
Variable pay system in the one in which employees are paid according to their performance
levels over a period of time and their accomplishments. The pros and cons of a variable pay
system are discussed below:
Pros:
- An obvious advantage of a performance-based pay system is that it encourages high
performance amongst the employees and ensures higher productivity.
- performance related pay can make it easier for the managers to keep their employees
motivated and engaged in their jobs
Cons:
- A major disadvantage of a variable pay system is that it can create an unfair competition
amongst the employees (Hamel)
- At times, performance related pay can have an adverse impact on the well-being of the
employees as they might feel burdened with the responsibility of working harder to maintain
their standard of living
- Performance related pay can create an ambiguity amongst the candidates during a recruitment
process.
- Retaining workers during tough market conditions can become challenging for an
organisation if they are being paid on the basis of their performance levels.
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Variable Pay vs. Fixed Pay
Bibliography
Hamel, G. (n.d.). The Pros & Cons of Employee Pay Being Fixed Vs. Variable & Dependent
on Performance . Retrieved April 18, 2019, from
https://smallbusiness.chron.com/pros-cons-employee-pay-being-fixed-vs-variable-
dependent-performance-41368.html
Kappel, M. (2018). What Is Compensation? . Retrieved April 18, 2019, from
https://www.patriotsoftware.com/payroll/training/blog/what-is-compensation/
Kramer, M. H. (2018). The Pros and Cons of Earning an Hourly Wage vs. Salary . Retrieved
April 18, 2019, from https://www.thebalancecareers.com/compensation-hourly-vs-
salary-125647
Mello, J. A. (2010). Strategic Human Resource Management (3 ed.). South Western Cengage
Learning.
Vogt, C. (n.d.). Advantages & Disadvantages of Fixed Salaries . Retrieved April 18, 2019,
from https://www.sapling.com/11369735/advantages-disadvantages-fixed-salaries
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