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Variable Pay Could Solve Unemployment

Paying employees like professional athletes has the power to overcome the fears held by companies and the unemployed alike.

November 22, 2011
Related Topics: Compensation and Benefits, Payroll, Compensation and Benefits
KEYWORDS compensation
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Recently, NFL quarterback Michael Vick signed a new contract with the Philadelphia Eagles worth $100 million. The agreement was widely covered in the press as a story of redemption — Vick spent time in a federal prison on dog fighting charges — or as a story of extremes — Vick is now the third-highest-paid person in football. But I believe it’s a story about variable compensation and how risk-sharing can solve the global unemployment crisis.

Dig past the jaw-dropping $100 million total value of Vick’s contract and one learns that only $40 million is actually guaranteed. Despite all of the zeros contained in $40,000,000, what’s relevant is that this base pay is only 40 percent of the compensation package, leaving 60 percent at risk, based on performance. In even simpler terms: for every $1 of base pay, Vick can earn an extra $1.50 based on results. This is the magic ratio that provides the proper risk versus reward for both parties. Vick will earn his $100 million, and the Eagles will gladly pay it, but only if he stays healthy enough to lead the team for the next six years and achieves certain on-field results.

Paying employees like professional athletes has the power to overcome the fears held by companies and the unemployed alike. Businesses, which are sitting on record amounts of cash and profits, won’t hire permanent workers while they believe there is a risk of another economic downturn. They worry normal fixed salaries and benefits will quickly drag down profits and lead to more layoff pain if demand for their goods and services falters.

Fear is also causing many of the long-term unemployed to refuse jobs that pay more than unemployment, but less than what they were earning in their last job. The fear was described to me by one laid-off executive, “Once I accept a lower-level job with less pay, I’ll never get hired by someone back at my old salary level.” In other words, once you accept a job as a security guard, it will be hard to convince someone you’re qualified to be a vice president.

Variable pay programs — pay that includes low bases and dramatically higher performance bonuses — reduce risk for both businesses and the unemployed. Companies and their investors will have to share more of their future profits, but in exchange they will lower their short-term financial risk. Unemployed individuals take a short-term cut in pay, but gain guaranteed income that is higher than unemployment, access to benefits, the opportunity to be productive and the potential for substantially higher earnings.

The idea of variable pay for all workers doesn’t seem so radical if we use the lens of all of human history to peer through. In that history, pay has traditionally been tied to productivity. We consumed what we hunted and gathered, later we bartered our crops and livestock and after the invention of money, we received it for the goods we made or for specific services we performed.

Then in a socio-economic wrinkle in time — just a short 200 years ago — the industrial revolution came along and the nature of factory work introduced the idea of paying for time. Unskilled workers were paid wages by the day, with many people working as many as 16 hours in a 24-hour period. In the 1900s the term white collar worker came into being to describe office workers who received salaries based on annual estimates of time worked.

Critics of the variable pay revolution will say this is just a sneaky way to pay workers less. But remember the Vick formula: $1.50 of extra pay for results for every dollar of fixed pay. Applying this to a $100,000 a year salaried worker, a variable program might pay the worker $60,000 base — plus benefits — with performance bonuses up to $90,000 per year. Bonuses would ideally be paid quarterly and be based on a mix of individual, department and company results.

Done right, paying workers like professional athletes will enable individuals to earn more money and companies to reduce short-term risk, and potentially solve the crisis of chronic unemployment.

Kevin Kruse is a serial entrepreneur and co-author of We: How to Increase Performance and Profits Through Full Engagement. He can be reached at editor@talentmgt.com.

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