What is pay variance?

Pay variance is the difference between an employee's base pay and the pay they are actually paid at the end of a pay period. It can also refer to the difference between an employee's base pay and their total compensation. Total compensation/actual pay is usually higher than the negotiated amount due to company bonuses and overtime pay.

What are the reasons for wage deviation?

Wage fluctuations are usually caused by unexpected or uneven demand – employers have to ask their employees to work extra hours to compensate for that demand. This can result in:

• Overtime:   Employees who work  overtime are paid 1.5 times their regular wage.
• Company bonuses:  Employers may give bonuses to teams or individuals for achieving a goal. In the case of salary variances, this may be simply meeting customer demand with a limited workforce.
• Additional responsibilities:  If an employee becomes ill or unexpectedly leaves the company, another employee may have to take over some of their responsibilities until the position is filled. When this employee takes on additional responsibilities, employers may offer them additional compensation.

What is an example of pay variance?

Let's say you run a package fulfillment center. One of your employees who assembles your packages (we'll call him Kyle) was hired to work 40 hours per week. Kyle is scheduled for five days at a rate of $15 per hour. This means that, without pay variance, you pay Kyle $600 per week.

Now, let's say you've received an unusually large order that needs to be fulfilled on the day Kyle is off work. Unfortunately, some of your other employees scheduled to work that day are sick, so Kyle has to cover for them.

Kyle works a full eight-hour shift to complete this order, which means he is eligible for eight hours of overtime:

$15  (Kyle's salary)  x 1.5  (overtime calculation)  = $22.50  (Kyle's overtime wage rate)

$22.5 x 8  (number of overtime hours)  = $180  (Kyle's overtime compensation)

$180 + $600  (Kyle's usual salary)  = $780

In this example, your employee's pay variance is $180.

What are the negative impacts of pay deviation on employers?

Salary fluctuations are a product of unpredictable variables that can prevent employers from accurately predicting pay during a pay period. Salary fluctuations can make budgeting difficult.

How can you make up for the pay gap?

Although you should always pay employees the wages they deserve, there are some things employers can do to better manage their pay variances:

• Arrears payment:  Arrears payment means delaying payment until the end of the pay period. This is a common practice among most employers. Doing this lets you know what you need to pay your employees ahead of time.
• Stop bonuses:  If your company is struggling financially, and salary fluctuations are putting a strain on your budget, you can stop company bonuses.

Which employers are likely to be affected by pay deviation?

You will most likely be affected by pay variance if your company does any of the following:

• Employs workers who are paid on an hourly basis
• Provides overtime compensation
• Company-wide bonus offers
• Operates with a small workforce
• Schedules employees to work a maximum number of regular hours each week