Pay Mix

What pay mix is

Pay mix (مزيج الأجر) is the ratio between the part of target pay that is fixed and the part that depends on reaching a result. It does not describe how much someone is paid, and it neither raises nor lowers that amount. What it describes is how the target figure has been divided between the money that arrives whatever happens and the money that arrives only if what was agreed is achieved.

A pay mix is written as two numbers that add up to 100, such as 80 to 20: the fixed part is four fifths of the target and the contingent part one fifth. The figure a pay mix applies to is target pay, meaning the amount the employee receives on reaching exactly the result set for them, no less and no more. Apply the ratio to any other figure and it describes a different number.

Two pay mixes on one target

Take two jobs, each with target pay of SAR 240,000 a year, which differ in their pay mix and in nothing else:

• The first mix, 80 to 20: the fixed part is SAR 192,000, and the contingent part on reaching target is SAR 48,000.
• The second mix, 50 to 50: the fixed part is SAR 120,000, and the contingent part is SAR 120,000.

If each employee reaches 100% of their result, each receives SAR 240,000, and the mix makes no difference of a single riyal between them. That is the only case in which the two are equal. It is also the case on which a pay mix is written, and nothing guarantees that it will actually occur.

What pay mix does when a result is partly reached

Assume the contingent part is paid in proportion to what was achieved. At 80%:

• The first employee receives 192,000 plus 80% of 48,000, which is SAR 230,400, or 96% of target.
• The second employee receives 120,000 plus 80% of 120,000, which is SAR 216,000, or 90% of target.

At 120%:

• The first employee receives SAR 249,600, or 104% of target.
• The second employee receives SAR 264,000, or 110% of target.

Between those two levels of achievement, forty points apart, the first employee’s pay moved by SAR 19,200 and the second employee’s by SAR 48,000. The gap does not come from how hard either of them worked or from what either achieved. It comes from a figure written into the contract before the year began. That is what it means to call a pay mix a decision: it sets how much of the pay moves, not how much is paid.

A third ratio confused with pay mix

In the first mix the variable part is described as 20%, which is correct when measured against target pay. Measured against the fixed part, however, it is 25%, because 48,000 is a quarter of 192,000. In the second mix the variable part is 50% of target and 100% of the fixed part.

Both figures are correct, but they say different things, and the two can be confused in a job offer. An offer may state “an incentive of 25%”, meaning the share measured against fixed pay, and the candidate may take it as a quarter of everything they will receive, when it is in fact one fifth. A percentage means nothing until the figure it is measured against has been named.

How a threshold turns a pay mix into a sudden drop

The calculation above assumes the contingent part is paid in proportion to achievement from the very first point. A plan need not work that way: it may set a threshold below which nothing is paid.

Put a threshold at 70% on the second mix. An employee who reaches exactly 70% receives 120,000 plus 84,000, which is SAR 204,000, or 85% of target. An employee who falls slightly short of that receives SAR 120,000, half of target. The difference between the two is SAR 84,000, more than a third of the entire target pay, and it turns on a difference in result that is barely noticeable.

This is the point at which a plan can produce behaviour it never intended: pushing a result up to the threshold by whatever means are available, or abandoning the effort once the threshold is out of reach. The higher the threshold sits in a mix weighted towards variable pay, the larger the amount that depends on it. The threshold and cap figures in these examples are assumptions chosen to show the effect. They are not a benchmark, and they are not taken from any source.

How a cap cuts off the other end of a pay mix

Just as a threshold can be set at the bottom, a cap can be set at the top. If the contingent part of the second mix were limited to what it pays at target, an employee who reached 120% would receive SAR 240,000 instead of SAR 264,000.

That employee still stands to lose SAR 24,000 at 80% achievement, but has nothing left to gain above target. So a mix presented as symmetrical becomes lopsided through a single condition, and an employee can look at the mix without looking at the condition.

How the measurement period changes what a pay mix delivers

A pay mix states how large the contingent part is. It does not state the period over which the result is measured, and the period alone can change the final figure even when the year’s performance stays exactly the same.

Take the second mix, with its contingent part of SAR 120,000, and measure it quarterly, so that each quarter carries SAR 30,000. Suppose the employee reaches 60%, then 140%, then 60%, then 140%, an average for the year of exactly 100%:

• With no threshold and no cap, the employee receives SAR 120,000, which is what the year’s result warrants.
• With a 70% threshold in each quarter, both weak quarters pay nothing, and the employee receives SAR 84,000, a shortfall of SAR 36,000.
• With a 100% cap in each quarter, everything above 100% in the two strong quarters is cut off, and the employee receives SAR 96,000, a shortfall of SAR 24,000.
• With both the threshold and the cap, the employee receives SAR 60,000, half of what the year’s result warrants.

That is four figures for one performance, and what separates them is a procedural decision about the measurement period, not the mix. A pay mix stated without a known measurement period therefore gives no basis for calculating what will be paid, and no basis for comparison with another mix, because the amount paid under one plan can be double the amount paid under another plan with an identical mix.

The employer’s side of pay mix

A pay mix divides risk between two parties, so whatever moves for the employee moves for the organisation in the opposite direction. Take twenty employees on each of the two mixes, with the same target pay as before. The planned cost of each team is SAR 4,800,000 a year.

If both teams reach 80%, the first team costs SAR 4,608,000, a saving of SAR 192,000, and the second costs SAR 4,320,000, a saving of SAR 480,000. A mix weighted towards variable pay protects the organisation’s costs in a weak year, but it costs the organisation the same amount in a strong one.

That side of the arithmetic is left out when a pay mix is presented purely as an incentive for the employee. The mix also moves part of the volatility of results off the organisation’s books and into the employee’s income. A budget built on target alone can be surprised in both directions, not only upwards. Whether a mix weighted towards variable pay raises output is a separate question: we found no published measurement of that effect for the Saudi market, and the calculations above do not answer it.

Pay mix belongs to the job, not to the person in it

A pay mix is derived from how much influence the job has over its result. A job whose output moves with the decisions of the person holding it can carry a mix weighted towards variable pay. A job whose output is governed by a schedule, or by demand the jobholder does not create, cannot, because tying that person’s pay to what they do not control transfers the organisation’s risk to them with nothing given in return. For the same reason there is no correct figure that makes one pay mix preferable to every other: the mix follows the influence the job has on its output and the state of the market for that job.

There is a consequence for recruitment too. The heavier the variable share, the narrower the group of people who would accept the job may become, because a candidate with fixed monthly commitments may look at the fixed part alone. So a pay mix can decide who is able to apply before it decides what anyone will be paid. That effect does not show up in a pay scale. It shows up in who reaches the interview at all. An employee value proposition is also written for that stage, to attract the people an organisation wants.

How pay mix differs from variable pay, a retention bonus and total rewards

• Variable pay. This is the name of the component itself and of the forms it takes, of which commission pay is one. Pay mix is the ratio of that component to target pay. The first says what the component is; the second says how large a share of the whole it makes up.
• A retention bonus. It is paid for staying, not for a result, so it does not enter the pay mix at all: the mix describes what moves when a result is reached.
• Total rewards. The term brings together everything an employee receives, in cash and otherwise, whereas pay mix covers only target cash. Two identical mixes can sit within different total rewards.

The definition of pay mix settles no statutory question about the components of pay. Where each component stands, and what follows from it, is a matter for the definition of that component.

What distorts a reading of pay mix

• Quoting it without target pay. A 50 to 50 mix on a high target is not the same as a 50 to 50 mix on a low one, although the ratio is identical.
• Measuring it on what was actually paid. Totals taken from a payroll statement record what was paid in a period. An employee who reaches 60% for a whole year appears to be on a mix of about 87 to 13, when the contract says 80 to 20. A pay mix is calculated on target; the amount actually paid measures achievement, not design.
• Averaging different jobs into one mix for the whole organisation. An average mix for a department with both sales and support jobs describes neither, and it hides the fact that all of the risk sits with one group.
• Leaving out the threshold and the cap. Two identical mixes, one with a high threshold and one with none, are not the same arrangement, as the quarterly example shows.

Before a pay mix is written into a contract

The shortest test of a pay mix is to calculate what the employee receives at three points: the lowest result expected, the target, and the highest result expected. If the lowest of the three is not enough for the jobholder to stay in the job, the mix cannot work in practice, however fair it looks at target.

Three things are written down with the mix, because it does not hold together without them: what is measured, where the threshold sits if there is one, and where the cap sits if there is one. On its own a pay mix describes half of the plan, and the other half decides what is actually paid.

This is an explanation of the concept, not legal advice.

Related terms

• Commission Pay
• Wage Drift
• Geographic Pay Differentials
• Milestone Awards
• Employee Value Proposition