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