The question “What is KPI-based salary?” is one that garners attention from both employees and employers. This form of compensation is tied to performance evaluation metrics (KPIs) and is widely adopted for its transparency and ability to drive productivity. In the article below, KMC will delve into the concept of KPI-based salary and highlight important considerations that Enterprises operating in Vietnam need to be aware of..

What is KPI-Based Salary?

KPI-based salary is a type of compensation determined by an employee’s key performance indicators (KPIs). It is an essential tool for Enterprises to assess both individual and team performance and effectiveness. The KPI-based salary is calculated based on the achievement of specific pre-established objectives, helping employees focus on accomplishing critical business outcomes and contributing to the overall development of the organization.

This compensation model is often represented through specific metrics that reflect the work performance of individuals or teams. Depending on the nature of the job and role, the KPI targets may vary, and the salary is adjusted accordingly to ensure fairness and motivate employee efforts.

KPI-based salary is not just a method for measuring performance but also a motivational tool, as Enterprises typically implement reward or penalty policies based on the level of KPI completion. This helps drive employees to achieve their goals in a clear and transparent way.

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How Many Types of KPI-Based Salary Calculations Are There?

KPI-based salary is a compensation system that allocates pay according to employees’ performance indicators, designed to encourage positive contributions and improve work efficiency. This system can be divided into several categories, each suited to the specific nature of the job and the objectives of each department within the organization. Below are the common types of KPI-based salary:

Sales KPI-Based Salary

Sales KPI-based salary is one of the most common forms, particularly in Enterprises. Aimed at driving revenue results, the KPI salary in the sales department not only motivates employees but also helps the organization identify business areas with growth potential or those facing difficulties.

Financial KPI-Based Salary

Financial KPI-based salary helps Enterprises monitor key financial indicators, such as profit and overall financial performance. These metrics are typically overseen by the leadership and finance departments and reflect how well the organization achieves its financial objectives.

Marketing KPI-Based Salary

In the marketing department, KPI-based salary is assessed based on the effectiveness of marketing campaigns and customer engagement. This system not only measures specific outcomes but also enables the business to adjust marketing strategies to achieve optimal results.

Sales Team KPI-Based Salary

Sales team KPI-based salary applies to sales personnel and is typically evaluated based on revenue growth during each period. This influences not only individual compensation but also the overall performance of the sales team.

Project Management KPI-Based Salary

For project management departments, KPI-based salary is used to evaluate project progress and outcomes. It is an essential tool for Enterprises to monitor whether projects are achieving their objectives and to measure the success of each project.

How is KPI-Based Salary Calculated?

When it comes to KPI-based salary, many people immediately associate it with a compensation system based on work performance. Currently, to calculate KPI salary for employees, Enterprises typically apply one of the following two common methods:

KPI Performance-Based Salary Calculation

The formula for KPI performance-based salary calculation:

KPI Component Performance = (Actual Results Achieved / Target) * Weighting

Total KPI Performance = Sum of all KPI Component Performances

In practice, Enterprises commonly apply two methods to calculate KPI-based salary:

  • 2P Salary Method: This method calculates salary based on two main factors: job position and work performance. Employees receive a fixed salary corresponding to their job position and a bonus based on their performance achievements.
  • 3P Salary Method: Unlike the 2P method, this approach combines three factors: salary based on position, salary based on individual competency, and salary based on work performance. This method is preferred by many companies for its fairness and effectiveness in motivating employee productivity. In addition to the base salary, employees are rewarded according to their work results and personal capabilities.

KPI Bonuses for Employees

One of the most common salary calculation methods today is combining a fixed salary with a KPI-based bonus. For companies that do not want to make significant changes to their traditional salary structure, this method allows them to encourage employees to improve work performance while maintaining a stable base salary.

Employees receive a fixed monthly salary, with the KPI bonus added based on job performance. Companies can set KPIs on a monthly, quarterly, or annual basis, and if employees meet the established targets, they will receive corresponding bonuses. This flexible approach helps Enterprises maintain stability while boosting labor productivity.

Key Considerations for KPI-Based Salary Payments

In the context of many companies now implementing KPI-based salary to assess and reward employees, it is important to understand the related regulations. Below are some key considerations regarding KPI salary payments that Enterprises need to be aware of:

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Is KPI Salary Subject to Social Insurance Contributions?

According to Clause 26, Article 1 of Circular 06/2021/TT-BLDTBXH, wages subject to social insurance contributions include salary, allowances, and any additional payments agreed upon in the employment contract. However, KPI salary is only paid when employees meet their targets, which means it is not subject to social insurance contributions as it is not a regular payment.

Is KPI Salary Subject to Personal Income Tax (PIT)?

Based on Article 2 of Circular 111/2013/TT-BTC (amended in Circular 92/2015/TT-BTC), KPI salary is subject to personal income tax as it is considered income (salary or wages) and is not classified as a tax-exempt allowance.

Can Salary Be Deducted for Not Achieving KPI?

According to Article 102 of the Labor Code 45/2019/QH14, salary deductions can only be made when an employee damages company property. Therefore, if an employee fails to meet their KPI, deducting salary would be a violation of the law.

What is the KPI Salary Calculation Policy?

Currently, there are two common methods for calculating KPI-based salaries:

  • Companies calculate KPI salaries themselves, primarily for lower-level employees or collaborators.
  • Companies determine bonuses or penalties based on KPI results, with a proportional relationship between salary and employee effort.

KPI-based salary payments are not only based on work performance but also reflect other factors such as the employee’s competency and job position.

Through this article, we hope you have gained a better understanding of the KPI salary calculation method and the related regulations in Vietnam. Recognizing the challenges companies face when implementing this salary system, KMC is committed to providing Professional payroll services to help Enterprises optimize their payroll processes and ensure full compliance with current legal regulations.