TOW#527 — Fixed vs variable salary
I just got back from a networking event where the main topic of conversation was whether it’s better to give fixed or variable salaries — to whom, how, and whether it’s best to combine the two.
A model that works and has proven to be positive in capitalist-oriented economies (of which we’re also a part), is the right combination of the two — striking a balance between the goals of the company and those of individual employees. Of course, a division must first be made according to the positions and responsibilities of each team member. For those in the front line or working with/in sales, realisation, norms, etc., the best motivating factor in certainly variable compensation. If I sell more or work more pieces into the norms, I should get a bigger reward. Those working in the background (back line) and supporting the front line can be on fixed wages. Of course, depending on the company and the management, it’s good to periodically analyse employee performance and reward them annually, every six months or after the successful completion of a particular job.
A few positive and negative aspects of fixed and variable salaries:
• Productivity: variable pay of course increases employee motivation and consequently productivity. Anyone with good motivation will do their best to achieve higher targets;
• Competition among employees: it can be positive for employees themselves to compete in order to achieve better results, but it can also be negative. An intensely competitive atmosphere could develop, which would surely have a negative impact on the workplace as a whole.
• Standout employees: it’s a given that variable pay separates true professionals from the rest. By looking at the results, it’s very easy to see how much people are working, as well as how they’re going about it.
• Client relations: this aspect can also be considered from two sides. If we’re stimulated and receive a higher reward, and if we make our customers happy, then of course a variable component has a positive effect. But sometimes it can do the opposite, for example if you’re in sales. The final days before goals/targets need to be met can be counterproductive, with sellers pressuring buyers so that they can meet their targets.
• Recessions: what’s interesting is that fixed wages are a greater motivator in slower economies and during world crises. As sales decline in times of recession, sellers can’t achieve their goals and, in addition to not hitting targets, they’re frustrated and demotivated. Therefore, a fixed salary provides some assurance that at least they won’t be taking home less than that.
The most interesting thing for me, from my experience of working with many companies and sales teams, is that salespeople here aren’t really interested in having a variable option. I’ve talked with many managers and they ask how they can stimulate employees with a percentage when they aren’t motivated by that type of incentive. I’ve been thinking a lot about why this is the case, when I know that in the US, for example, café employees are fighting to be waiters, rather than bartenders, even though waiters get $2 an hour and bartenders $8. This is because waiters know that they’ll earn much from tips.
A kind of general conclusion of mine is that, firstly, we come from a socialist system, where there was no variable part and that way of working and stimulating employees simply didn’t exist, and the other thing is that we’re constantly in recession and safety is more important than the uncertainty that comes with variable wages.
Whatever the reason, we live in a cruel capitalist system and must adapt to the working conditions. You just need to find the optimal balance.
Wishing you success with the changes to come,
Petar Lazarov
Member of the Team
MACEDONIA-EXPORT Consulting
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