Fixed Pay vs Incentives: Where Should Your Review Dollars Go?

Every annual remuneration review involves a quiet but consequential decision that many Australian organisations never consciously make: should this year’s salary review budget go into base salaries, or into variable pay?

The default answer is usually base salary. Increases are applied to fixed pay, incentive settings roll over unchanged, and the review concludes. But for organisations managing tight budgets — and that is most organisations — the fixed pay vs incentives question deserves deliberate attention. The two destinations for your review dollars behave very differently, and the right mix depends on what you are trying to achieve.

by Elizabeth Ames

Fixed Pay vs Incentives: Where Should Your Review Dollars Go?

Every annual remuneration review involves a quiet but consequential decision that many Australian organisations never consciously make: should this year’s salary review budget go into base salaries, or into variable pay?

The default answer is usually base salary. Increases are applied to fixed pay, incentive settings roll over unchanged, and the review concludes. But for organisations managing tight budgets — and that is most organisations — the fixed pay vs incentives question deserves deliberate attention. The two destinations for your review dollars behave very differently, and the right mix depends on what you are trying to achieve.

by Elizabeth Ames

by Elizabeth Ames

Why the distinction matters

A dollar added to base salary and a dollar added to incentive opportunity are not the same dollar.

Fixed pay increases are permanent and unconditional. They compound every year, flow into superannuation, leave loadings and other on-costs, and are paid regardless of performance. Once granted, they are extremely difficult to unwind.

Incentive dollars are conditional and repeatable. They are paid only when performance warrants it, can be recalibrated each cycle, and create a direct line of sight between contribution and reward. Our latest Incentive Pulse found nearly half of organisations spend less than 5% of profit on STI — for many, there is headroom to use variable pay more deliberately before affordability becomes a constraint.

Neither is inherently better. The question is what each is doing for you.

When the dollars should go to fixed pay

Base salary is the right destination when the problem is market positioning. If a benchmarking analysis shows roles drifting below market, no amount of incentive opportunity will fix it — candidates and employees anchor on guaranteed pay, and a below-market salary with generous upside reads as risk, not reward. Fixed pay increases are also the right tool for correcting internal inequities, including gender pay gaps, where the issue is the underlying salary, not the variable outcome.

Prioritise fixed pay when:

  • Benchmarking shows base salaries falling behind your target market position
  • You are remediating internal relativity or pay equity issues
  • Turnover data points to guaranteed pay as the departure driver
  • Roles are operational or have limited line of sight to incentive measures

When the dollars should go to incentives

Variable pay is the right destination when the problem is performance leverage. If your salaries are competitive but outcomes feel flat — high and low performers rewarded similarly, no genuine upside for outperformance — adding more to everyone’s base will not create tension. Redirecting budget into incentive opportunity, particularly above-target upside, rewards the people delivering value in the years they deliver it.

Prioritise incentives when:

The hybrid approach most organisations should consider

In practice, the strongest reviews split the budget deliberately rather than defaulting to one destination. A common structure: a market adjustment pool applied to base salaries to maintain competitiveness and correct inequities, alongside a targeted reallocation toward incentive opportunity for roles where performance leverage matters most.

This approach also helps manage the long-term cost base. Because fixed pay compounds and variable pay does not, even a modest shift in mix — for example, holding base increases slightly tighter and lifting target incentive opportunity — can fund meaningful performance upside without growing permanent costs at the same rate.

One caution: shifting pay mix toward variable is a change to the employee deal and should be handled transparently. Employees need to understand what is changing, why, and what they can do to earn the upside. Done quietly, it looks like cost-cutting; done openly, it looks like what it is — a stronger link between contribution and reward.

Three questions to ask before you allocate

  1. Where are we against market on fixed pay? If you don’t know, benchmark before you budget.
  2. Is our incentive plan creating genuine performance tension? If outcomes cluster regardless of performance, more base salary won’t fix it.
  3. What does our cost base look like in three years under each option? Model the compounding effect of fixed increases against the flexibility of variable spend.

How The Reward Practice can help

We help organisations make the fixed-versus-variable decision with data rather than default — combining benchmarking analysis, incentive design and affordability modelling to structure a review budget that works harder. If your review has always meant “base salary increases,” it may be time to look at the whole picture.

Make every review dollar count. Contact us now.