Fixed Salary: Definition, Pros, and Cons

What does fixed pay mean?

The amount that an employee receives from their company at the conclusion of each payroll cycle is known as their fixed pay or fixed salary. Any compensation that an employer promises to pay out, whether monthly or annually, is considered fixed pay.

Your fixed pay may or may not include additional payments to items like health insurance, retirement savings, or allowances (for a car, a house, etc.) based on business policy and/or your job contract.

‘Fixed’ means that an employee receives a set sum every pay period regardless of how many hours they work or how good their work is.

Variable versus fixed pay

Employees’ compensation is based on their performance, which is known as variable pay. This is on top of the employee’s regular salary. Variable compensation can take several forms, including rewards based on performance, sales, referrals, and profit sharing.

A “variable” salary means that it can fluctuate in response to changes in the employee’s or the business’s performance.

Example 1:

The monthly pay for a manager is $2,000. A $200 monthly housing allowance is a set component of the manager’s contract. The fixed pay consists of these two installments.

The manager receives a bonus of $4,500 as the year comes to a close. Bonuses are a kind of variable compensation.

Example 2:

The manager in question has requested a reduction in hours and relocates to a different city. Therefore, the manager’s salary will now be adjusted to reflect an hourly rate by the organization.

The manager’s workweek typically consists of 32 hours one month and 45 hours the following. In addition, the manager will receive a two-month stipend to assist with the cost of moving to a different city. Furthermore, the manager receives a sales incentive of $450 upon the completion of important deals for the organization. Everything that goes into his salary is considered variable pay in this instance.

Good and bad things about fixed pay

Pros of having fixed pay

• Companies are better able to plan ahead and anticipate costs when employees have regular incomes that don’t fluctuate substantially from month to month. Since they know the amount in advance, employees are able to better manage their expenses every month.
• Employee security: Having a set amount each month can be appealing to some workers. Both employee satisfaction and retention rates can improve as a result.
• The ability to choose one’s own work schedule is a perk of having a fixed pay rate. An employee’s pay rate remains unchanged regardless of whether they work a little earlier or later.

Drawbacks to fixed pay

• Performance: Employees receive variable pay when their performance is deemed good or great, as opposed to fixed pay, which is not directly related to performance. Paying workers a set amount every month might not motivate them to excel.
• Companies have less leeway when using fixed pay because it doesn’t matter how much labor is available; the employer still has to pay the employee the same amount. Conversely, as workload increases or decreases, variable pay helps the business control expenses by adjusting shifts accordingly.