When structuring sales compensation plans, two critical terms often surface: pay mix and pay at risk. While they might sound similar, each represents distinct elements within incentive compensation design. Here’s how to distinguish between them clearly and effectively.
Pay mix refers to the proportion of a salesperson’s total compensation that comes from fixed pay (salary) versus variable pay (commissions, bonuses, incentives). For instance, a salesperson might have a pay mix of 60/40, meaning 60% fixed salary and 40% variable compensation tied directly to performance outcomes.
A high pay mix (more variable pay) typically implies a stronger incentive for sales performance. For example, a 30/70 pay mix indicates the salesperson’s earnings heavily depend on their sales results, thus theoretically motivating increased effort and focus. More aggressive pay mix is often utilized when a sales role is deemed to have a high degree of control over the sales outcome, and by creating a greater financial incentive to perform sales results are expected to increase.
Pay at risk, on the other hand, specifically measures how much of the variable compensation might realistically remain unpaid if a salesperson's performance is below expectations. It highlights the potential downside of not hitting sales targets, reflecting the likelihood and degree to which the variable component of pay could be lost.
It is possible to have a scenario where a sales team has a high variable pay mix, yet experiences relatively low pay at risk. For example, consider a sales representative who earns flat commissions based on total territory sales in a mature market with substantial repeat business. Although their pay mix might be highly variable (e.g., 70% commission-based), the predictability and reliability of repeat sales significantly reduces actual pay risk. In this case, even lower-performing salespeople are likely to receive much of their variable pay, resulting in lower "true" pay at risk.
A practical way to measure pay at risk is to compare the earnings of the lowest-performing salespeople (typically the 10th percentile) against median performers. Here's how you calculate this:
Pay at Risk (%) = (10th Percentile Earnings ÷ Median Earnings) × 100
If the 10th percentile earns 80% of the median, this indicates low pay at risk, suggesting that most salespeople still receive a large portion of their variable pay even with below-average performance.
Conversely, if the 10th percentile earns only 40% of the median, the pay at risk is significantly higher, clearly showing that poor performers will see substantial reductions in earnings.
Sales compensation plan designers can deliberately increase pay at risk through several strategic choices:
Ramped Commission Rates: Commissions can start low and increase as salespeople approach or exceed sales targets, significantly rewarding higher performance while penalizing lower results.
Goal-Based Designs: Setting clear sales goals with larger incentives awarded only upon reaching or exceeding these targets amplifies the potential downside for those who fail to meet expectations.
Performance Thresholds: Establishing minimum performance thresholds below which no variable pay is earned creates significant downside risk for salespeople, emphasizing the importance of meeting or surpassing base performance levels.
These tactics help sharpen the focus of sales teams on critical performance benchmarks and significantly influence their behavior and effort levels.
Understanding both pay mix and pay at risk allows organizations to tailor compensation plans that effectively motivate sales teams while managing the appropriate balance between incentive and security. Clarifying these elements helps companies optimize their compensation strategies to drive the desired sales behaviors and outcomes.