How is fixed and variable compensation typically affected by an employee's impact on the bottom line?

Variable pay is designed to reward employees based on their performance and contributions to the organization's goals, specifically regarding financial outcomes. When an employee has a significant impact on the bottom line, the rationale is that their efforts lead to increased revenue, reduced costs, or both. This increased financial contribution can justify higher variable compensation, such as bonuses or commissions, as a way to incentivize continued high performance and align the employee’s interests with the organization's success.

In contrast, fixed compensation represents a stable salary that does not fluctuate based on performance or business results. While it provides job security and predictability for employees, it does not reflect the direct relationship between an employee’s contributions and the company’s financial outcomes. Therefore, employers often use variable pay to encourage and reward exceptional performance that directly impacts profitability. This dynamic creates a clear correlation: as an employee's positive influence on the bottom line increases, their variable pay tends to rise proportionately, reinforcing high performance and engagement within the company.