Variable Pay

What variable pay is

Variable pay (الأجر المتغيّر), also called variable compensation, is the part of an employee’s income that changes according to a particular result. That result can be the performance of an individual, the performance of a team or the performance of the organisation as a whole. Variable pay is defined against fixed pay, which the employee earns regardless of the result. The difference between the two lies in what the amount depends on: fixed pay does not depend on any result, while variable pay does, and its amount moves as the result moves.

The forms variable pay takes

Variable pay can take the following forms, which differ in what the amount is tied to:

• Commission. It is a percentage of the value of sales or of the amounts collected. Because it is a percentage, the amount rises and falls with the value on which the percentage is calculated.
• A performance bonus. It is an amount tied to reaching a target within a given period. Both the target and the period form part of the arrangement: the amount is linked to the target being reached within that period.
• Profit sharing. It is a share of the organisation’s result that is distributed among the people who work for it. The result being measured here is that of the organisation, not that of the individual employee.
• A joining bonus or a retention bonus. It is an amount tied to an event rather than to performance, such as the completion of a specified period.

What makes variable pay work

Variable pay serves its purpose when the following conditions are in place:

• A measure the employee can influence. Tying pay to a figure whose levers the employee does not hold produces frustration, not motivation.
• A written calculation rule. It should be set out in a form the employee can apply to their own case without help. An amount the employee cannot calculate does not guide what they do.
• A known payment date. It should be known in advance and should fall close to the performance being rewarded.
• A cap and a floor, announced. Where a scheme has either, it should be made known from the start. Discovering a cap or a floor only after the target has been reached costs the scheme its credibility.

The risk that comes with variable pay

A measure to which pay is tied can become a target in itself, and what is not measured can decline. Tying pay to the number of calls can raise the number of calls and shorten them. Tying it to sales volume alone can bring in customers who do not stay.

The remedy is not to remove the link between pay and the result. It is to add a qualitative condition alongside the quantitative one, and to count the result only when both conditions are met together, not when one of them is met on its own.

Variable pay in the Saudi Labor Law

Variable elements of the wage are subject to a specific rule when the end of service award is calculated. Article 84 of the Saudi Labor Law (نظام العمل) takes the last wage as the basis for calculating the award. That article says wage without a qualifier, and Article 2 of the Labor Law provides that a wage used without a qualifier means the actual wage (الأجر الفعلي). Among the items Article 2 of the Labor Law lists in the actual wage are commission, a percentage of sales and a percentage of profits, paid in return for what the worker markets, produces or collects, or for what they achieve by increasing or improving production. The general rule is therefore that these elements enter the wage on which the award is calculated.

Article 86 of the Labor Law allows a departure from that rule. It permits the two parties to agree that all or some of the commissions, the percentages of the sale price and similar elements of the wage paid to the worker, which by their nature can increase or decrease, are not counted in the wage on which the end of service award is settled. That permission is drafted as an exception to Article 8 of the Labor Law, which voids any condition that contradicts the Labor Law, and any release or settlement of the worker’s rights under it made while the contract is in force, unless it is more favourable to the worker.

The question therefore turns on an agreement between the employer and the employee, not on an internal label the employer gives an amount. Article 86 of the Labor Law names commissions and percentages of the sale price, together with similar elements. It does not name a percentage of profits, and in the sources we reviewed we found no provision that settles whether a profit share falls among those similar elements. For any particular case, the reference is the Labor Law and the organisation’s work regulation (لائحة تنظيم العمل).

How variable pay differs from an allowance

An allowance is paid in respect of a circumstance, such as housing, transport or the nature of the work, and it does not depend on a result. Variable pay depends on a result by definition. A housing allowance does not fall because sales have dropped, whereas a commission does.

The provisions relied on are those of the Saudi Labor Law as published by the Ministry of Human Resources and Social Development: Article 2 (the actual wage, the items it lists, among them commission and the percentages of sales and of profits, and the wage used without a qualifier), Article 8 (void conditions, to which Article 86 is an exception), Article 84 (the last wage as the basis of the end of service award) and Article 86 (the agreement that commissions, percentages of sales and similar variable elements are not counted in that basis). Royal Decree M/44 of 1446H, in force since 19 February 2025, added other definitions to Article 2 of the Labor Law and left the actual wage definition worded as before. That decree did not amend Article 84 of the Labor Law.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.