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Pay Mix
Incentives are incredibly useful compensation tools. However, it takes a lot of work to determine the right balance between base pay and incentive pay. This is where a pay mix can help.

What Is a Pay Mix?

In the simplest of terms, pay mix is the ratio between fixed and variable compensation. Most often it is defined as the ratio between base pay (salary or hourly wage) and incentive pay (bonuses, commission, etc.). Typically, when business and HR professionals utilize pay mix, they apply it to the compensation of sales positions. Pay mix ranges from any number of ratios, but generally between 60:40 and 90:10. In the example of a 60:40 pay mix, 60% of employee pay stems from base pay and 40% from incentive pay to make up 100% of the total target compensation (TTC). TTC is often also referred to as On-Target Earnings (OTE). Both terms include the word “target” because when a pay mix is involved (usually in sales positions), overall compensation varies depending on performance and earned incentives.

Why Is Pay Mix Important?

Getting your pay mix right can be incredibly challenging, but there are a few important reasons why investing time and consideration into its construction is worthwhile.
  • Productivity. Most often, HR professionals utilize a pay mix to encourage sales employees to increase their productivity in direct return for increased pay. If the pay mix is too heavily centered on base pay, employees may not be incentivised enough to increase their productivity because they receive too little in return. On the other hand, if it’s too heavily centered on incentives, employees may get burned out more quickly because they feel they can’t earn their target compensation.
  • Morale. The wrong pay mix can be incredibly damaging to employee morale. While there is no one correct pay mix recommended for everyone, each organization can optimize their pay mix to increase morale. Mixes with incentive percentages that are too high feed unhealthy competition. On the other hand, mixes with too high of base pay percentages can be discouraging and prompt employees to complain about lack of flexibility to succeed in their roles.
  • Retention. The optimal pay mix should incentivize employees to stay with the organization longer because they feel they can succeed and grow (or at least maintain) their salary in their role. According to the Alexander Group, “management may have a difficult time recruiting and retaining local talent if base salaries are too low or, conversely, when the target incentive is too low—it becomes too difficult to earn upside rewards.”

Factors That Go Into Determining Pay Mix

When determining a pay mix for a role, there are many things to consider. How challenging is the work and how difficult is it to make a sale? What incentivizes current employees? What are other companies doing for similar roles? What are the market trends? How may we need to change it in the future?

Job Influence

According to OpenSymmetry, “as a general rule, the greater influence the salesperson has on the sale, the greater the variable component (and the less guaranteed base salary” should be in their pay mix. This is the greatest contributing factor to determining the pay mix of a position. If it is incredibly challenging to make a sale, should your employees be incentivized to overcome great adversity to earn their target compensation or should their base pay be higher to ensure employees are able to reach that target? This entirely depends on the organization. If sales are frequent, small and necessary, it may be beneficial to have a pay mix with a higher variable pay component and lower base pay to ensure that sales targets are met.

Company Dynamic and Culture

Another incredibly important aspect to consider when determining a pay mix is the internal dynamic of the company and culture. Do employees feed off of competition or are they often eager to do better and achieve higher? Then maybe higher variable pay will fit well at your organization (50:50 or 60:40 for example). Do employees prefer to work together to achieve team goals? Maybe a moderate incentive percentage would be more fitting (70:30 or 80:20 for example). Do your employees thrive on stability and struggle with change? Maybe a more conservative incentive percentage would help (90:10). One last but critical component to consider with company dynamic and culture is the pay disparity between different roles. Should all roles have a similar pay mix or should some be higher in base pay while others are higher in incentives? Pay equity and employees’ attitude of fairness should be taken into consideration.

Competitors

Competitors’ pay structure can be insightful to guide you toward creating a competitive and well-rounded pay mix. Pay mixes similar to competitors can either help your organization compete in the market or get lost in the shuffle. Market trends can help advise your decision and your company’s compensation policy to lead, lag, or match the market. Let this help you decide what pay mix would be appropriate for your organization.

Changes in the Environment

In our ever-changing world, organizations need to be adaptable. When developing a pay mix, consider how flexible your compensation plan is to environmental and societal changes. For example, if your organization were to receive a surge in demand for your product, would your pay mix be affordable with all the new sales or would the cost be too great? If you had too high of a percentage in incentives, you may be paying through the nose to keep up with increased demand. On the other hand, if there was a sudden decrease in demand, if the pay mix is centered on incentives, would employees make enough to stay with the organization? Consider the flexibility of your pay mix and your organization’s policies to change it if the need would occur.
Topics
Raelynn Randall, MHR, MBA

Raelynn Randall, MHR, MBA

Rae has acquired HR experience in team leadership, research, training, recruiting, project management, and mentoring upcoming HR professionals. She is fascinated by workplace culture and the many implications it has on the world of business, especially HR. When possible, she seeks out opportunities to expand her knowledge and give back to her community.
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Frequently asked questions
Other Related Terms
Compa-Ratio
Compensable Factors
Compensation
Compensation Philosophy
Compensation Strategy
Executive Compensation
Health Insurance Benefits
Internal Equity
Job Classification
Lag-the-Market Compensation Strategy
Lead-the-Market Compensation Strategy
Meet-the-Market Compensation Strategy
On-Target Earnings
Pay Differentials
Pay Transparency
SPIFFs
Salary Range
Salary Survey
Sales Compensation
Skill-Based Pay
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