Payroll Calculated According To KPI
June 27, 2022
Payroll calculated according to KPI is one of the four popular forms of salary payment and is widely applied in today's business models. To avoid disadvantages or legal problems with this unique form, the following article, Talentnet, will give you the most intuitive view of the 'Pay for Performance’ policy: What does paying for performance mean for the business? What to consider when applying pay for performance? How to calculate salary according to KPI?
1. Learn the concept of KPI pay
KPI (Key Performance Indicator) is a performance measure commonly used by corporate units to evaluate employee performance. As a result, paying for performance means that the employer company will base the appropriate salary for its employees on the results of the measurement indicators achieved in each period.
Currently, many companies, especially FDI enterprises or foreign companies, prefer this form of payment because:
- The format helps to encourage potential employees to express their personalities
- A form to help individuals manage their finances effectively
- Encourage employees to work effectively and actively
- Simple to implement
- A tool to observe and evaluate employees
- Maximize employee performance
- A factor in business development
2. How does the enterprise apply apply the salary calculation according to KPI?
It is a common form of salary payment. Still, its practical application in enterprises is difficult to discover and explain because each working unit and enterprise will be bound to a standard set of rules depending on the management mechanism or its operating and development policy.
However, in the market today, there are two primary regulations specifying the form of salary calculation according to KPI:
- Enterprises will calculate salaries directly according to KPI. This form is often applied to low-level employees, part-time employees, and collaborators
- Enterprises determine the level of reward and punishment based on KPI: The ratio between the received salary and the effort spent will be proportional to each other
Salary paid according to KPI will be based on the following three essential factors:
- P1 (Pay for Position), i.e., salary is paid based on job title. The table of salary regulations will be commensurate with the position and specified
- P2 (Pay for Personal competence) – Salary is based on human capacity. The competence of personnel here is the process or work performance that the employee has devoted to the assigned job
- P3 (Pay for Performance) – Pay based on work results, i.e., salary will be paid based on progress and the employee’s level
3. What should be considered when applying ‘salary according to KPI’?
Although the form of salary payment is commonly used, when it is used in practice, there are a few issues to keep in mind:
- The goals and KPIs achieved must be appropriate, specific, explicit, and close to the level and nature of the work
- It is necessary to monitor and supervise employees on a regular basis, as well as to create conditions that encourage them to complete their assigned tasks
- Leaders should avoid putting too much pressure on salespeople because it creates a stressful environment, which leads to pent-up stress and inefficient work
- It is necessary to develop a compensation policy that is both fair and equitable
4. How to calculate KPI and salary according to KPI
Performance KPIs are calculated using the following formula:
Performance KPI component = (Actual results achieved/Goal) * Weight
Total KPI performance = Sum of part KPI performance
There are two commonly applied methods for calculating salary according to KPI.
- The 2P method means that salary will be calculated based on the position, title, and actual results of that employee completing the work. So the wage will be calculated as the sum of P1 and P3.
- The 3P method means that salary is based on all three components: position, job title, achievements and results, and an employee’s capacity. In other words, this method pays a combined salary of fixed salary and soft salary based on work efficiency. The formula for this method is salary = P1 + P2 + P3.
In particular, the 3P method is often applied more often due to the fairness in the efficiency achieved, solving the problem of limited qualifications or seniority but lacking justice in the assessment of expected development contributions.
5. Other frequently asked questions
5.1. When the KPI is not met, will employees have their salary deducted?
Employees absolutely cannot lose their salary when they do not meet the set KPI performance due to the following two regulations:
- In the 2018 Labor Code, articles 90 and 91 state that: “Wage is the amount of money that an employer must pay to an employee under an agreement to perform a job, including the salary according to the job or positions, titles, additional salaries, and other additional payments. In all cases, employees are always entitled to the minimum wage, the lowest salary paid to do the most straightforward work in normal conditions to ensure a minimum standard of living in line with economic development.”
- Article 5 of the Labor Code 2019 also clearly states: “An employee has the right to receive a salary suitable to their occupational skill level based on an agreement with the employer, to have labor protection, occupational hygiene, and safety. They are entitled to leave according to the regime, receive annual leave with pay and enjoy collective benefits.”
5.2. Is the form of ‘salary payment according to KPI’ subject to PIT?
According to the 2007 PIT Law, the form of salary according to KPI is not on the list of items exempt from PIT, so the compensation received when calculating the KPI will be taxed according to the prescribed limit.
Specifically, items subject to PIT include salaries, wages, or other amounts of the nature of wages, salaries and allowances, and allowances.
Also, salaries calculated according to KPI are not included in the items not subject to CIT in this Code.
Social insurance contributions are calculated based on the employee’s monthly salary according to Clause 2, Article 5 of the Law on Social Insurance 2014. Meanwhile, the monthly salary on which social insurance premiums are based is specified as the salary, salary allowance, and other benefits. Additional clauses are agreed upon in the contract under Clause 2, Article 17 of Decree No. 115/2015/ND-CP. Also, in Circular 06/2021/TT-BLDTBXH, it is defined that the additional amounts included in the payment of social insurance premiums are those with a specific amount and the agreed salary and are paid regularly in salary periods.
From another perspective, the salary according to KPI is based on the work performance achieved by the employee without a fixed KPI level. The monthly KPI achieved is not the same, so the salary calculated in this form is not fixed.
According to KPI, a salary is exactly an income with a specific number but not a regular one, so this case is not counted as a salary to pay social insurance.