Types of at-risk pay
As mentioned, at-risk pay refers to several different types of pay. Here are just a few of the most common types of at-risk pay that organizations use:
- Commission: Typically used to incentivize sales professionals, commission can make up some or all of an employee’s salary. The total amount of commission an individual earns is based on the compensation structure used and on the individual’s performance.
- Bonuses: Bonuses are awarded based on a range of factors including individual performance, team performance, or even the entire organization’s performance. Organizations often pay out bonuses less frequently than sales commission- sometimes done at the end of the year to discourage employee churn mid-year.
- Profit Sharing: Profit sharing is a common type of performance bonus. Most profit-sharing programs pay each employee a specific percentage of the organization’s profit. Profit sharing is intended to incentivize performance and teamwork across job functions.
The idea behind at-risk pay is that it’s not guaranteed. Earning at-risk pay requires some level of performance.
Advantages of at-risk pay
At-risk pay is an effective lever to pull for organizations who wish to motivate employees and improve performance. Here are some of the main advantages that companies find when they use an at-risk pay structure:
- Boosts performance: At-risk pay encourages employees to strive for excellence in their daily tasks. When employees see that their hard work and effort is rewarded financially, they’re more likely to put in extra effort.
- Creates accountability: At-risk pay also fosters a culture of accountability within an organization by holding employees accountable for their work. It gives them tangible goals to strive for and rewards them when they achieve those goals. Thus, at-risk pay often helps to create an environment where people take ownership of their actions.
- Improves motivation: At-risk pay rewards employees for reaching goals or targets. To earn the maximum amount of money, teams have no choice but to perform at the standard set before them.
- Reduces turnover: At-risk pay can also help reduce sales turnover rates, particularly in sales. Many organizations struggle with retaining talented team members. When employees feel fairly compensated for their work, they’re less likely to seek out employment elsewhere.
Disadvantages of at-risk pay
Although at-risk pay has its advantages, it also has its disadvantages in some circumstances. The most commonly cited pitfalls of at-risk pay include the following:
- Creates high-stress work environments: The nature of at-risk pay plans may cause undue stress or pressure on employees. This dynamic can lead to burnout and reduced productivity if not managed accordingly. Moreover, if an employee fails to meet their targets, this can result in financial losses.
- Dissuades collaboration and teamwork: When compensation is tied to individual performance, you may find that employees focus solely on their own goals. For this reason, at-risk pay can create an atmosphere where collaboration is discouraged. In a workplace where employees prioritize their own performance, you may find poor communication and cooperation among teams and departments. In turn, this hurts an organization’s results over time.
- Incentivizes the wrong behaviors: At-risk pay is only as effective as the strategy behind it. If an organization uses at-risk pay to incentivize the wrong behaviors or plans don’t include the right controls, employees can game the system. In cases where this is true, organizations spend more on compensation but generate less results in return.
Communicating at-risk pay to employees
Creating an effective at-risk pay structure is only half the battle. An equally important piece of the puzzle is communicating your compensation structure to employees.
Too many organizations spend time and resources building their comp plans, but fall short when it comes to clearly communicating compensation changes to reps. The lack of a communication strategy is a fatal flaw that can render even the most brilliant comp plans useless.
When reps have to do the heavy lifting to figure out their comp plan, they have less time to spend on sales activities . In fact, reps spend just 33% of their day talking to prospects, while the rest is devoted to internal or administrative tasks (source). This confusion dampens productivity and undermines comp plans designed to motivate teams.
The only remedy is a formal incentive communication strategy. Developing a communication process for sales compensation can improve employee satisfaction, boost pay transparency, and relieve your reps of a massive administrative burden. Here are a few steps we recommend taking:
- Document your current sales compensation process.
- Create a communication plan for each step of the process.
- Be sure to define your communication channels and document expectations clearly.
- Test your communication tactics, collect feedback, and improve processes as you go.
Interested in learning more? Check out the complete guide for communicating comp structure here: A Foolproof Framework for Better Incentive Communication.
Statistics and facts about at-risk pay
Are you interested in introducing an at-risk pay component to your organization’s compensation strategy? Here is some of the latest research to get you started:
- 74% of organizations said their organization’s annual incentive plan was “moderate to effective” in achieving its objectives (source).
- 90% of top-performing companies use incentive programs to reward their sales associates (source).
- Properly structured incentive programs can increase employee performance by 44% (source).
For more research into effective sales comp programs, check out the following resource: 29 Critical Sales Compensation Benchmarks & Statistics.
