What Is Pay Mix? Definition & How It Is Calculated

What is pay mix?

Pay mix is a ratio between the fixed salary or hourly wage an employee is guaranteed (base pay) and the additional pay they earn based on performance, such as commissions and bonuses (incentive pay).

This percentage split is used to create an employee's total compensation package, with common mixes ranging from 60% base salary and 40% commission to 90% base salary and 10% commission.

To calculate it, you simply divide the base salary by the total expected compensation, known as on-target earnings (OTE).

Pay mix (%) = (Base salary/OTE)*100

Here's an example: If employee A's OTE is $200,000 and his base salary is $80,000, we can calculate his compensation mix as follows:

Pay mix (%) = ($80,000/$200,000)*100=40%

This means 40% of employee A's total compensation comes from his base salary, and the remaining 60% is tied to his performance through commissions or bonuses. This is often expressed as "40/60."

Why is pay mix important?

The pay mix is important for balancing stability and motivation in a team. Here's why:

• To attract and retain top talent: A balanced compensation mix attracts and retains talent by offering varied pay types that match employee preferences and motivations.

• To motivate employees: Variable compensation, such as performance-based bonuses, can motivate employees by directly linking effort to rewards, increasing their engagement and productivity.

• To control costs: Balancing fixed and variable pay controls costs. Fixed pay is stable, while variable pay rewards exceptional performance without raising fixed costs permanently.

• To allow for flexibility: A good compensation mix can adapt to the business. Organizations can adjust fixed and variable pay to align with goals, market conditions, and employee performance.

• To improve employee engagement: A fair and clear compensation mix can increase employee engagement by showing that good work is rewarded fairly and helping them feel connected to the company's goals.

Compensation Software has a large dataset of compensation information for different positions across various industries and locations. This allows you to see what other companies offer for similar roles, helping you set your own compensation mix strategy.

Common pay mix ratios

On average, the common compensation mix ratio for base salary versus variable pay is around 60/40 (base/variable). This means employees typically receive 60% of their compensation as a fixed salary and 40% as variable pay, often linked to performance metrics like commissions or bonuses.

Other common ratios include:

• 50/50: This structure is often seen in industries like software sales, where representatives require strong communication and consultative skills, along with the ability to close deals.

• 70/30 or 75/25: These ratios focus more on a guaranteed portion (70% or 75%) as base salary. This is common in complex sales roles or for positions with extra responsibilities beyond closing deals.

• 80/20 or 90/10: These structures provide more income security with less variable pay. They are suitable for roles that prioritize stability and core skills.

• 0/100: This structure is less common but found in industries like outside sales. It offers high earning potential with income tied to performance, leading to fluctuations.

Compensation Software helps ensure fairness by identifying and fixing pay gaps across roles and departments. It uses data to adjust salary structures, which ensures employees are paid fairly based on their contributions.

Examples of pay mix

Here are a few examples of different compensation mixes.

Scenario 1: 50/50

John works for a sales company and earns $100,000 per year. His compensation includes a base salary of $50,000 (50%) and a variable pay of $50,000 (50%), based on his sales performance. This encourages John to meet his sales goals since his earnings depend on his performance.

Scenario 2: 70/30

Sarah is a marketing manager earning $80,000 per year at a medium-sized firm. She receives a base salary of $56,000 (70%) and a variable pay of $24,000 (30%), based on the marketing department's performance.

Scenario 3: 0/100

Dan is a freelance consultant earning $60,000 per year. He doesn't have a fixed salary; instead, his pay is entirely based on the number of consulting projects he completes. This type of compensation mix, where there's no fixed salary and earnings depend on performance, is common in freelance roles, offering flexibility and potential for higher earnings.

FAQs

The following are the frequently asked questions about pay mix:

What is the pay mix philosophy?

Pay mix philosophy is the strategy behind how an organization allocates an employee's total compensation package. It combines the fixed salary with bonuses, commissions, and benefits to attract and keep talented employees while encouraging them to achieve specific targets.

What’s the average pay mix in the US?

While there's no single "average" compensation mix across the US, most companies tend to land somewhere between a 60/40 and 44/56 split, with the higher fixed salary portion (60%) being more common. Studies show the average compensation mix in the US is 44/56. A 2023 study found that 50/50 is the most common compensation mix in the sales industry.

Using Compensation Software to analyze relevant data can help you avoid setting compensation mixes that are either too high or too low compared to the market. This can attract and retain top talent while keeping your compensation costs competitive.

How often should pay mix be reviewed and adjusted?

It's best to review and adjust your compensation mix annually. Consider market changes, competitor actions, internal performance, and employee feedback. Regular monitoring helps keep your pay strategy competitive, motivating, and aligned with your company's goals.

Create reports that analyze compensation across your organization. These can help you explain your pay mix decisions to employees and build trust in the compensation process.