News & Column
Part 3 | Is your Compensation System crisis-ready? Designing for flexibility under Vietnam’s Labor Code
Part 3 of the Executive Series: “Compensation Strategy in Vietnam: Essential Insights for Business Leaders”
This edition addresses a critical but often underestimated question:
“Can your compensation system withstand unexpected changes — and protect your business when it matters most?”
In today’s unpredictable business landscape, compliance alone isn’t enough. Compensation systems must be thoughtfully designed to stay legally sound and strategically flexible — especially in Vietnam’s fast-moving labor market.
Why flexibility matters — Even when you’re compliant
Many companies operating in Vietnam have structured their compensation and HR systems to ensure legal compliance. That’s a good start — but in times of operational pressure or sudden organizational changes, a rigid system can become a liability.
A resilient compensation framework balances three critical needs:
- Compliance with Vietnam’s labor law
- Strategic flexibility in managing workforce costs
- Fairness and transparency that employees can trust
To build such a system, HR leaders must first understand the legal constraints — and opportunities — within Vietnam’s Labor Code.
Three Legal Realities that shape your compensation strategy
1. Employment contracts progress in stages — So should your evaluation process
According to Vietnam’s Labor Code (Article 20), the standard employment lifecycle consists of:
Probation contract → Fixed-term labor contract (renewable twice) → Indefinite-term labor contract
In other words, employers have up to three distinct stages before transitioning to an indefinite-term contract.
These periods can be used strategically to assess whether the employee’s performance, responsibilities, and overall contribution justify their current salary level.
With the right internal processes, contract transitions can serve as decision points — rather than automatic renewals.
2. Fixed salaries cannot be reduced unilaterally
Under Article 102 and Article 127 of the Labor Code, employers are not permitted to reduce an employee’s base salary without their consent — even in the case of underperformance. Salary deductions and disciplinary pay reductions are also heavily restricted.
What this means for employers:
To retain flexibility, it is essential to embed performance-based flexible pay components — such as variable bonuses, allowances, or incentive schemes — into your total compensation package. These allow for adjustment based on results, while keeping base pay compliant and stable.
3. Bonuses and salary increases are not mandatory — Unless guaranteed in writing
Although annual pay raises and 13th-month bonuses are common practice in Vietnam, they are not legally mandated (Articles 103 and 104).
However, once such provisions are explicitly written into labor contracts or collective labor accord - for example, “Annual raise based on CPI” or “Bonus guaranteed at one month’s salary” - they become legally enforceable and difficult to modify.
Best practice: Use flexible language in compensation policies and contracts, such as:
“Salary adjustments and bonuses are based on company performance and individual evaluation.”
This approach allows businesses to remain competitive in normal conditions, while preserving the ability to adapt in times of change.
Designing for resilience: Practical takeaways for HR Leaders
To strengthen your compensation system - and protect your business - consider the following best practices:
Treat contract transitions as opportunities to recalibrate pay fairness
- Use these points to review whether the employee’s compensation remains aligned with their actual role and contribution.
- Embedding objective evaluation criteria helps eliminate passive renewals and promotes transparent decision-making.
Design for flexibility when fixed pay can't go down
- In Vietnam, even if an employee underperforms, their base salary cannot be reduced without their consent. This restriction limits how companies can respond to performance issues.
- To preserve flexibility, it's essential to incorporate variable pay components — such as performance bonuses, incentives, or shift-based allowances — early on in your compensation structure.
- These elements allow for performance-based differentiation without breaching legal limits or eroding trust.
Build legal flexibility into compensation terms
Avoid overcommitting in writing to specific raise amounts or bonus guarantees. Use contract language that links these to measurable outcomes — such as company financials or individual KPIs — to retain necessary flexibility.
Start with market-validated insights
Participating in the 2025 Vietnam Salary Survey provides access to a complimentary Executive Summary outlining key salary benchmarks from the current Vietnam labor market.
This information will enable your leadership team to:
- Measure the competitiveness of your current compensation levels
- Identify potential misalignments and talent-related risks
- Make confident, data-backed compensation decisions for 2025
Participate now — exclusive benefits for participating companies
📍Coming up in Part 4:
Is the Head Office Aligned with Local Expectations?
In the next edition, we’ll explore the common gaps in compensation expectations between head office and local managers — and what practical steps HR leaders can take to manage these differences effectively.
Stay informed. Stay competitive.