Pay at Risk Definition
Pay at risk is the portion of an employee’s compensation that is variable, or “at risk” of not being paid out. This “at-risk pay” is typically performance-based and is in contrast to the fixed pay (salary) that the employee receives as a condition of employment.
Communicating Pay at Risk
Variable payment is typically expressed as a percentage split between fixed and variable. For example, someone might be on an 85/15 plan. This means that 85% of their pay is fixed (salary) and 15% is at risk and paid based on some type of a performance measure. The amount or percentage of pay risk varies based on the role:
- Real estate agents, mortgage brokers, stockbrokers and insurance agents are often on a 0/100 plan where 100% of their earnings is at-risk pay.
- Sales reps will find that their pay at risk ranges from 90/10 to 50/50 plans depending on the company and industry.
Changing Levels of Pay at Risk for Sales Teams
Since our founding, Xactly has been tracking changing trends in incentive compensation among sales teams. Over the past 5 years, the median pay at risk for an account executive on the sales team has gone from 35% of the total pay package to 45%.
Types of Pay at Risk
Commissions, discretionary and non-discretionary bonuses, profit-sharing plans, piece-rate payments, and other forms of payment are not guaranteed.
Commissions: This is the classic pay at risk example. As mentioned above, any rep on a plan made up of variable pay – whether that’s 10%, etc. – will have their commissions at risk of not being collected should they not reach their performance bonuses. On that note, it’s always good to remind that the bulk of variable pay should be based on individual performance. Meaning, putting one’s pay at risk based on the actions of others or a team, especially when targets aren’t met, can be seen as unfair. This will almost always lead to frustration and employee turnover.
Non-Discretionary Bonuses and overtime pay “Bonuses": For purposes of calculating overtime pay, section 7(e) of the FLSA provides that non-discretionary bonuses must be included in the regular rate of pay. Non-discretionary bonuses include those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, and bonuses designed to encourage employees to remain with a facility.”
Discretionary Bonuses: Discretionary bonus payments are NOT communicated as part of the Pay at Risk ratio. The difference being that there isn’t an established cause and effect in this case—in terms of meet goal and get paid. Instead, these are payments where the employer has the discretion whether or not to pay, and where the amount and the availability is not known until close to the end of the payment period. As you can imagine, non-discretionary bonuses typically aren’t as effective as other types of incentives. Going back to the “cause and effect” mentioned above, sales reps are motivated by the creation of such a type of Pavlovian association between the job performed and the rewards received. Sure, you probably wouldn’t award a discretionary bonus to someone who didn’t pull their weight, but to not reward a top performer because their bonus plan wasn’t rooted in variable pay is damaging.
Profit-Sharing Plans: If you think about what a profit-sharing plan is, where employees are allocated a share of the company’s profits, you can see why this is considered to be “at risk.” In recent years, the news has seen a resurgence of major companies using the profit-sharing bonus. These kinds of bonus plans are based on predetermined sharing rules that define the split of gains between the company and the employees. Simply put, if the company does well so will the employees. If the organization is faltering, employee bonuses will shrink as well.
For example, In 2013, factory workers at Lincoln Electric each received, on average, $33,029 in bonuses! Their bonus was nearly 62% of most employees’ yearly salary. The company ended up sharing a whopping $100.7 million with its workforce – about one-third of the company’s total profits. To some, this generosity may be shocking. Others will recognize Lincoln Electric’s savvy plan to make the success of the company as a whole a boon for each individual. Companies are handing out the big bucks because profit sharing drives performance.
Employees under this kind of plan understand that the higher the profits of the organization are, the bigger their piece of the pie will be. This bonus sets itself apart by encouraging employees to think about themselves as an integral piece of the company puzzle.
While we all hope the people that work at a given company already feel like what they do matters, when you incorporate profit sharing into your bonus plan, you ensure that your employees see the link between their hard work and the success of the company.