What is At-Risk Pay?
At-risk pay, also called performance-contingent compensation or variable pay, is the portion of an employee's total compensation that is only paid if specific performance goals are achieved. Unlike base salary, which is guaranteed, at-risk pay is contingent on results.
The term "at-risk" refers to the fact that this portion of compensation is at risk for the employee - it's not guaranteed but depends on individual, team, or company performance. For salespeople, at-risk pay is typically the commission or bonus paid upon achieving sales targets.
At-risk pay is closely related to pay mix, which describes the ratio between fixed and variable pay. With a 70/30 pay mix, 30% of Total Target Compensation (TTC) is at-risk.
Why Do Companies Use At-Risk Pay?
Companies implement at-risk pay for several strategic reasons:
Motivation and Performance Focus
When part of compensation is on the line, it creates a natural incentive for employees to perform. The risk of lower earnings motivates higher effort and goal-oriented work.
Alignment with Company Goals
At-risk pay directly links the employee's interests to company results. When employees only receive full compensation upon goal achievement, they naturally work toward the same objectives as the company.
Flexible Labor Costs
For the company, at-risk pay provides a natural mechanism to adjust labor costs based on business results. In good periods, employees are rewarded, while costs decrease in slower periods.
Attracting Top Talent
Ambitious candidates are often attracted to high at-risk pay, as it provides the opportunity for significantly higher earnings than a pure base salary would allow.
Calculating At-Risk Pay
At-risk pay is calculated as the variable portion of Total Target Compensation (TTC). Here are concrete examples:
Example 1: Account Executive with 70/30 Pay Mix
- TTC: $120,000 annually
- Base Salary (70%): $84,000
- At-Risk Pay (30%): $36,000
The employee is guaranteed $84,000 but can earn up to $120,000 (or more with accelerators) at full target achievement.
Example 2: SDR with 80/20 Pay Mix
- TTC: $65,000 annually
- Base Salary (80%): $52,000
- At-Risk Pay (20%): $13,000
Example 3: Senior Account Executive with 60/40 Pay Mix
- TTC: $180,000 annually
- Base Salary (60%): $108,000
- At-Risk Pay (40%): $72,000
Typical At-Risk Pay Levels
At-risk pay varies significantly depending on role, industry, and company culture:
Low At-Risk Level (10-20%)
- Customer support and service roles
- Administrative functions
- Junior sales roles (SDR/BDR)
- Roles with limited direct impact on results
Moderate At-Risk Level (25-35%)
- Account managers
- Customer success managers
- Marketing roles with lead generation responsibilities
- Mid-level sales roles
High At-Risk Level (40-50%+)
- Senior account executives
- Enterprise salespeople
- Sales leadership
- Transaction-based sales roles
Industry Benchmarks for At-Risk Pay
At-risk pay levels vary by industry. Here are typical ranges in the US market:
SaaS / Technology
- SDR/BDR: 15-25% at-risk
- Account Executive: 30-50% at-risk
- Enterprise AE: 40-50% at-risk
- Sales Manager: 25-40% at-risk
Financial Services
- Relationship Manager: 20-40% at-risk
- Investment Advisor: 30-60% at-risk
- Insurance Sales: 40-70% at-risk
Healthcare / Medical Device
- Sales Representative: 25-40% at-risk
- Territory Manager: 30-45% at-risk
- Regional Sales Director: 35-50% at-risk
Benefits and Drawbacks of At-Risk Pay
Benefits
- Increased Motivation: Employees work harder when their income depends on results
- Higher Earning Potential: Top performers can earn significantly more than their base salary
- Alignment: Employee goals are directly linked to company success
- Scalability: Labor costs naturally scale with business results
- Fairness: Hard work and results are directly rewarded
Drawbacks
- Financial Uncertainty: High at-risk can create stress and financial instability
- Short-term Focus: Employees may prioritize short-term gains over long-term relationships
- Recruitment Challenges: Some candidates prefer security over high potential
- Complexity: Requires robust systems for tracking and payment
- Potential for Gaming: Complex plans can be exploited
At-Risk Pay and Risk Profile
The choice of at-risk level should match both the role's nature and the employee's risk profile:
High Risk Tolerance
Employees with high risk tolerance typically prefer:
- Higher at-risk pay (40-50%+)
- Aggressive accelerators for overperformance
- No or low caps on commission
- Frequent payouts for quick feedback
Low Risk Tolerance
Employees with low risk tolerance prefer:
- Lower at-risk pay (15-25%)
- More stable, predictable income
- Team-based bonuses rather than individual
- Longer performance periods for smoothing
Best Practices for At-Risk Pay
To maximize the effectiveness of at-risk pay, consider the following:
1. Match At-Risk Level to the Role
At-risk pay should reflect how much the employee can influence their own results. Roles with direct sales responsibility should have higher at-risk than support functions.
2. Set Realistic Goals
The goals that trigger at-risk pay must be achievable but challenging. Unrealistic goals demotivate, while easy goals don't drive performance.
3. Communicate Clearly
Employees must understand exactly how their at-risk pay is calculated and what is required to achieve it.
4. Provide Ongoing Visibility
Use software to give employees real-time insight into their performance and expected payout.
5. Balance Short and Long-term
Include both short-term (monthly/quarterly) and long-term (semi-annual/annual) at-risk elements.
At-Risk Pay in Employment Contracts
When documenting at-risk pay in employment contracts, the following should be clearly stated:
- Base salary (guaranteed compensation)
- At-risk pay at 100% goal achievement
- Total Target Compensation (TTC)
- Pay mix (e.g., 70/30)
- Performance periods and payment timing
- Calculation method and any accelerators/decelerators
- Clawback conditions
Related Concepts
To fully understand at-risk pay, it's helpful to know these terms:
- Total Target Compensation (TTC): Total expected compensation at 100% goal achievement
- Pay Mix: The ratio between fixed and variable pay
- Variable Compensation: Synonym for at-risk pay in many contexts
- Base Salary: The guaranteed, fixed portion of compensation
- On-Target Earnings (OTE): Synonym for TTC
- Accelerator: Increased payout for overperformance
- Decelerator: Reduced payout for underperformance
Manage At-Risk Pay with Prowi
Managing at-risk pay can be complex, especially when different employees have different pay mixes and performance targets. Prowi automates the entire process.
With Prowi you get:
- Automatic calculation of at-risk pay based on individual compensation plans
- Real-time visibility for employees into their performance and expected payout
- Flexible pay mix configurations per role or individual
- Accurate payouts without manual calculation
- History and reporting for compliance and budgeting
Book a demo today and see how Prowi can simplify your at-risk pay administration.