This study analyses determining factors of the payment of variable compensation to employees of Portuguese companies, through a data sample which is representative of the Portuguese reality, for the years 2002 and 2003, covering around 28,600 employees. The study makes a distinction between the decision on whether or not to pay variable compensation, and the amount of variable compensation. This study is based on agency theory, as well as internal labor market theory. Our findings confirm that these two realities are based on different models. The hypotheses under study are tested using a series of models with discrete dependent variables or, although continuous, variables which are restricted within their field, in order to identify the characteristics of the firms and their employees, that can explain the amount and probability of receiving variable compensation, and the different determining factors of the various types of compensation, as well as possible interactions between them. The results show that the potential for promotion and career advancement is an alternative to the use of variable compensation, and that variable compensation is more commonly used at higher levels of the hierarchy, in the area of sales, in smaller firms, in branches of foreign firms (albeit with lower amounts) and for employees with higher level of education. In terms of profitability, the results reveal a positive correlation with probability of the existence of variable compensation, but only when measured by the accounting reality However, the amounts of variable compensation are higher in companies with lower profitability.