Contingent pay

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This should go without saying but disclaimer: The information provided below is for general informational purposes only and does not constitute legal, financial, medical, or other professional advice. You should consult with a qualified professional for specific advice tailored to your circumstances. 

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This feels like a dry article, so let’s spice it up with a TL:DR at the top. How much money we get for our jobs is more variable that we realise, and could be more variable than we anticipate. These variables can influence our behaviour for good or bad. They may even give us an edge on the competition.

What is Pay

The relationship between money and work is a fundamental question to employment, because at its heart, that is what employment is all about.  We provide our labour to an organisation in return for the legal tender of our country, which we can then exchange for goods or services from other organisations (which is in part derived from their exchange with their employee’s labour), but let’s not get too deep. 

Because we are talking employment, not volunteering, employees receive money for their work.  But- how we pay them and what we pay them for, affects what they do for us.

So let’s consider some different ways payment for labour can be structured and what impacts that structure has on the relationship between the worker and the organisation.  Discussed below are some different forms of payment, primarily for the purpose of getting you thinking about pay as more than just wages and salaries.

Non-contingent pay: salaries

Let’s cover off the basics first; the fixed amount, non-contingent salary.  Employment contracts based on salary are fixed amounts for doing a job, which do not go up or down based on hours or performance (well maybe down if they don’t do all their hours).  How many hours the employee is expected to perform can vary, based on national and organisational culture; it’s not uncommon for employees to work in excess of their contracted hours.

The fixed income of a salary is the most common because is it the most versatile.  It puts away (as much as feasible) the question of money for the work done; because the amount of money is fixed, it has the least impact on the behaviour and priorities of the parties in their work.

Time contingent pay:  wages

An employee on wages is paid depending on the amount of time worked.  It remunerates on one element of labour performed by the employee; how many hours they were present.  Wages do not take into consideration the productivity, the quality or the performance of the work done in that time, essentially assuming this was fine, and remunerating for amount of time spent in service of the employer.

Typically wages have minimal impact on the relationship between employer and employee, other than additional work beyond the contracted amount must be paid for.  Typically wages are used where the employer needs certainty that additional work will be worked when it needs to be worked, i.e. overtime, or the capacity to fit labour supply to variations in labour demand. Take your supermarket as an example; supermarkets have busy periods, so you want less checkout operators at the start and end, and the most over the busy period (e.g. 10am to midday).

Although cultures vary, and exploitation of salaried workers does happen, as a general rule, wages are suited where ‘goodwill’ to do additional work isn’t going to cut it.  The employer needs certainty that employee will commit to do the extra work, and the employee needs certainty they will be paid for it.

Performance contingent pay 

For example, tips. I include this mostly for the sake of comparison, and tips aren’t the only form of performance contingent pay, only a good example.  Where wages are contingent on time, tips are contingent on performance, where the remuneration received by the employee is dependent on how well they do their job.  I’m not going to go in depth on this, because there is a lot to unpack on the suitability, reliability and fairness of such systems, let alone cultural differences with tipping, but it is illustrative of remuneration environments where how well you do your job effects how much you get paid.  

Results contingent pay

For example, trades contractors. As above with tips, contractors are not the only shape this comes in, but are only good example.  I use the terms trades contractors to direct your thinking specifically to trades worker you engage to get a job done- fix a toilet, erect a scaffold, mow your lawns, deliver goods, and so forth.  How, when, how long, how they behaved while doing it, are all irrelevant- you need an output and you pay the required price for this output to occur.  If you want carpet installed- you pay the person when the job is done- how long, how well (so long as it’s acceptable) is irrelevant.

Output contingent pay

For example, piece work. is where a worker is paid per piece of work they complete.  This is essentially the same as contractors, this payment for output, not payment to attendance or quality, but unlike the example of contracted trade work, it can occur within an employment relationship, and/or be paid for parts of the final product.  Example of this include packing product at home, deboning meat, or data entry, where you are paid by the total number of completed tasks, a fixed price per task.

Piecework rates have some strong pros and cons.  In favour, it ensures you’re only paying for the needed task- if it’s not done, you don’t pay.  On the other hand, it incentives only what is paid for, and other considerations (e.g. quality) that could get in the way are disregarded, or only met to the bear minimum; don’t expect pride of artisanship when paying per output, and expect some risky behaviour going on-the opportunity to make more money is an incentive for people to take risks (especially OOS risks).

Partially or fully contingent employee pay

A final form of contingent pay for discussion here is employee contingent pay, where a portion (or all) of the total remuneration package for an employee is variable, depending on completion of work. 

Common examples are sales-based pay.  These involve a base salary, plus additional income for meeting performance targets (e.g a fixed amount per month for meeting targets) or an amount per completion of outcome (e.g. 30% of a sales commission per sale made).  Such arrangements are often industry, or role based, and often become preferred (or at least expected) by workers in those industries. 

Similar to piece rate discussed above, contingent pay focuses workers on the elements that are rewarded, but to the detriment of what is not rewarded.  If the metric rewarded is sales, elements to the role that are impediments, or at least extraneous to achievement of the sale are sidelined or side-stepped.

Should you think about this?

Yes? A bit. Pay is complicated, because it’s like air-conditioning; invisible but critical, and little changes can have profound is hard to spot impacts (see here and here for other discussions on the impact of pay).

There are a lot of good reasons why pay should be simply salary or wages. But there are good reasons to find complex ways to handle pay to focus employee’s behaviour and priorities. Many an organisation has succeeded, or failed, due how they used more influence their employees.

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