"Pay-At-Risk" Compensation Plans Aren't Unconditional Bonuses

by Ty Collins on February 29, 2020 in Employee Loyalty
Communicating performance data to a team member

Pay-at-risk pay is also called variable pay; the model connects employee pay to the financial health of the company, paying out more when the company is doing well and less when the company is struggling. Across the country, up to 90 percent of companies are using some form of pay-at-risk compensation plan.

The intention is usually to offer an incentive: if employees work harder, the company does better, and everyone makes more money. Commission-based pay may be the most well-known form of pay-at-risk compensation: stockbrokers, real estate agents, and mortgage brokers often get their entire paycheck this way.

For most pay-at-risk employees, though, there is usually a guaranteed pay component. Only about 12 percent of total payroll dollars end up tied to pay-at-risk plans for companies that participate in them. The exact ratio of variable pay to guaranteed pay is typically different from employee to employee, and depends primarily on pay grade and seniority.

How Do Employees Feel About Pay-At-Risk?

Employees may not always be head-over-heels in love with their pay-at-risk plans, especially if the company isn’t doing well. Things can get particularly tricky if the company is making money, but not enough.

According to CNBC, the equipment manufacturing giant Caterpillar had its most profitable year ever in 2012. The 60,000 non-union employees who participated in the company’s pay-at-risk plan received a combined $1.2 billion. The following year, when sales were even higher, pay-at-risk employees received 31 percent less.

Why? The record sales numbers fell short of internally set targets.

Is It Fair?

At Caterpillar, C-suite executives participate in pay-at-risk compensation alongside their lower-level counterparts, but higher-level leaders have access to incentives that less senior employees don’t get. Caterpillar Chairman Doug Oberhelman made 32 percent more in 2013 than in 2012, for instance, while his employees made less.

When an employee’s pay goes down, it can be disappointing. But when the CEO makes more under the same incentive plan, for many workers, it becomes an issue of income inequality.

Considerations for Employers

If you’re structuring a pay-at-risk plan for your employees, it’s important to think about situations like Caterpillar 2013. Will your plan help employees feel like they’re part of the company’s success, or will they feel unduly punished when a down year inevitably comes and they make less? Does the plan treat everyone fairly, if not equally?

Remember that no one likes to be punished for someone else’s mistakes, so think twice before you tie a person’s pay-at-risk compensation to team or company goals. Some companies can pull it off, but others can’t.

Legalities

In the end, most pay-at-risk compensation structures are legal, as long as the company abides by federal and state employment laws. Make sure that your employees will always be making at least the minimum wage for any given pay period. Otherwise, they could sue you for non-payment of wages.

When it comes to employment law, it’s always better to be safe than sorry. Before you implement any kind of pay-at-risk program, talk to an employment attorney or your internal corporate counsel to make sure you’re protected.

Meanwhile, consider reaching out to select team members and asking their opinions. It’s always good to know if your team would be on board with any kind of compensation shift.