You just received your offer letter
You just received your offer letter. Excitement fills the air. CTC: ₹15,00,000 per annum. You quickly calculate: ₹15 lakhs ÷ 12 = ₹1,25,000 per month. Perfect! Six months later, your first appraisal: 'Your performance didn't meet variable pay criteria. You'll get only 40% of the promised amount.' Suddenly, your '₹1,25,000' monthly salary drops to ₹95,000. Welcome to the fixed vs variable pay trap. This guide decodes your offer letter so you know EXACTLY what you're signing up for—and what you'll actually receive.
Key Takeaways
- Fixed pay is king: Plan life around guaranteed money, not CTC
- Variable >30% is risky: Unless you're in sales or have high risk appetite
- Ask historical payout data: Last 3 years average tells the truth
- Assume 60% variable payout: Unless proven otherwise with data
- Budget on fixed only: EMI, rent, expenses based on fixed pay. Treat variable as bonus.
Understanding Your Offer Letter Structure
Every offer letter has three main sections: (1) CTC—the big number at the top, includes everything including money you never see; (2) Salary Components—Fixed Pay (guaranteed), Variable Pay (conditional), Benefits & Perquisites; (3) Deductions—Employee PF, Professional Tax, Income Tax (TDS). What most people do: Look at CTC, accept, regret later. What smart people do: Understand each component's real value.
Fixed Pay: Your Guaranteed Money
- Basic Salary (40-50% of CTC): Core component; forms basis for PF, gratuity; cannot be reduced once agreed. Example: CTC ₹12L → Basic ₹5L (42%) = ₹41,667/month
- HRA (40-50% of basic): Tax-deductible if paying rent. Example: Basic ₹5L → HRA ₹2.5L = ₹20,833/month
- Special Allowance/Other: Balancing component, usually largest after basic. Example: ₹3.5L = ₹29,167/month
- Fixed Allowances: Conveyance ₹1,600/mo, Medical ₹1,250/mo, LTA, Communication. Total Fixed example: Basic ₹5L + HRA ₹2.5L + Special ₹3L + allowances = ₹10.99L annual = ₹91,600/month
- Why it matters: Certainty, budgeting, loan eligibility (banks consider only fixed), job security.
Variable Pay: The Conditional Money
- Definition: Portion dependent on performance, team, or company. Also called Performance Bonus, Incentive, At-Risk Pay. You might get 100%, 50%, or 0%.
- Individual Performance-Based: Annual rating determines payout. Outstanding 100%, Exceeds 80%, Meets 60%. Red flag: 'Manager discretion'
- Team/Department-Based: Entire team must hit targets. Your performance doesn't matter if team fails.
- Company-Based: Company must hit revenue targets. Economic downturn = zero payout regardless of your performance.
- Combination (Triple Lock): Individual 80% × Team 100% × Company 50% = 40% payout. Promised ₹5L variable → Actual ₹2L. Lost ₹3L.
Historical Payout Reality Check
- Good companies: 2021: 85%, 2022: 90%, 2023: 80%. Average 85% (reliable)
- Average companies: 2021: 60%, 2022: 70%, 2023: 50%. Average 60% (risky)
- Poor companies: 2021: 40%, 2022: 30%, 2023: 20%. Average 30% (don't accept)
- Red flags: 'We don't track' / 'It varies' / 'Most people get 100%' (lie)
The Fixed vs Variable Ratio: What's Good?
📊 Industry standards
Decision Framework
- Accept if Fixed ≥70%: You're in stable industry, have family/EMI commitments, want predictable income
- Accept 60-70% fixed if: Single, no commitments, confident in performance, historical payout ≥75%
- Reject if Fixed <60%: Unless pure sales (expected), variable truly achievable, you can afford risk
Real Offer Examples
- IT Company (Good): CTC ₹15L. Fixed 80.67% (Basic+HRA+Special ₹12.1L). Variable 10% (₹1.5L). In-hand ₹89,833 fixed, ₹99,833 with 80% variable. ✓ Low risk.
- Startup (Risky): CTC ₹18L. Fixed only 55.5% (₹10L). Variable 27.8% (₹5L), ESOPs 11%. Real fixed ₹83,333/mo → ₹74,633 in-hand. ⚠ High risk.
- Sales Role (Expected): CTC ₹20L. Fixed 41% (₹8.24L). Variable 50% (₹10L). In-hand ₹61,867 fixed, ₹1.45L if hit targets. ⚠ High variable but expected for sales.
- Consulting (Excellent): CTC ₹16L. Fixed 83.75% (₹13.4L). Variable 12.5% (₹2L). In-hand ₹97,207. ✓ Excellent structure.
Red Flags in Offer Letters
- Vague criteria: 'Subject to management discretion', No metrics, hard to challenge. Better: 'Outstanding 100%, Exceeds 80%, Meets 60%'
- Variable >40%: Half your 'salary' uncertain. Can't plan. Exception: Sales roles.
- Triple lock: Individual AND Team AND Company, Likely zero payout.
- Annual payment only: Resign in Feb = lose entire year's variable. Better: Quarterly payouts.
- Undefined basic: 'Details post-joining', They might set very low basic. Demand breakup before accepting.
- ESOPs as major component: Might be worth zero. 4-year vesting. Consider only fixed for budgeting.
- High reimbursements: Need to submit bills. Rarely claim full. ₹4L reimbursements = ₹2L actual.
- No historical data: Assume 50% payout max. Recalculate offer value.
Questions to Ask Before Accepting
- What is the detailed fixed vs variable breakup? (Bad: 'We'll share after you join')
- Variable payout % last 3 years? (Good: 85%, 90%, 80%. Bad: 'It varies' or 'We don't track')
- Exact criteria for variable? (Good: Rating thresholds. Bad: 'Based on performance')
- Individual-only or individual+team+company? (80% individual = mostly in your control)
- How frequently paid? (Best: Quarterly. Bad: Annual, no payout if you leave)
- Pro-rated if I resign mid-year? (Good: Yes. Bad: Lose months of work)
- Can I see a sample payslip? (Bad: 'We can't share that')
How to Negotiate
- Request higher fixed: Same CTC, lower risk. 'Can we make 85% fixed, 15% variable at same ₹15L?' Company cost unchanged.
- Quarterly variable payout: Better cash flow, reduces risk of losing payout if you leave.
- Pro-rated exit clause: Get variable for months worked if you leave. Get it in writing.
- Clear performance metrics: Define rating thresholds, payout %, individual vs team weightage in offer letter.
Calculating Real Monthly Income
- Conservative (Recommended): 100% fixed, 60% variable, 50% reimbursements, 0% ESOPs. Use for EMI, rent, essentials.
- Optimistic (If payout >85%): 100% fixed, 80% variable, 70% reimbursements, 20% ESOPs. Use for savings, investments.
- Loan eligibility: Banks consider 100% fixed, 50-70% variable, 0% ESOPs. Don't assume full CTC.
- EMI rule: EMI <40% of FIXED salary only. If variable isn't paid, you must still afford EMI.
- Emergency fund: 6 months of fixed salary, not CTC.
Final Checklist
- Understand exact fixed vs variable split
- Fixed component ≥70% of CTC
- Asked for 3-year historical variable payout
- Payout criteria clear and in writing
- Variable not triple-locked (individual+team+company)
- Pro-rata payout on mid-year exit confirmed
- Calculated realistic monthly in-hand (fixed only)
- Verified can afford lifestyle on fixed alone
- Read entire offer letter for hidden conditions
- Got all answers in writing
The Bottom Line
Your offer letter's CTC is a marketing number. What matters: Fixed pay (guaranteed), historical variable payout (realistic expectation), monthly in-hand (budgeting). Don't be dazzled by: Big CTC with 40% variable, 'Up to' language, vague criteria. Remember: ₹15L CTC with 90% fixed > ₹18L CTC with 60% fixed. Because ₹13.5L guaranteed > ₹10.8L guaranteed + ₹7.2L maybe. Your financial stability depends on what you WILL receive, not what you MIGHT receive. Choose certainty.
Need Help?
Need help understanding your offer letter? Use our Offer Letter Analyzer to break down fixed vs variable components. Or calculate your true in-hand with our In-Hand Salary Calculator.
Disclaimer
Salary structures vary by company, industry, and individual circumstances. The examples and percentages mentioned are illustrative. Always verify specific terms with your employer and consult HR for clarifications.