Why a guaranteed minimum changes risk-taking

Two salespeople earn the same commission rate. One has a guaranteed base salary and the other does not. The one with the base takes larger, riskier bets with clients. The commission is identical; the floor under it is not.

What everyone sees

The base salary looks like a retention tool — a way to keep the salesperson during a slow month. Its effect on the type of risks taken is less visible, because the connection between a guaranteed minimum and the riskiness of a pitch is not direct.

What is actually happening

Agency theory predicts that shifting downside risk away from the agent changes the agent’s behaviour. Holmström described the trade-off between risk sharing and incentive provision: as the agent’s downside is reduced, risk-taking increases because the cost of failure is absorbed by the principal. March and Shapira found that managers’ risk behaviour changes at reference points, and a guaranteed minimum sets a reference point below which losses are somebody else’s problem. The floor does not change the upside; it removes the downside, and a bet with no downside is evaluated differently from one with.

Why it stays hidden

The shift hides because it is rational. The salesperson is not behaving recklessly; they are responding to the incentive structure as designed. The principal who installed the guarantee did so to attract talent and reduce turnover, and the risk shift is an unintended consequence of a compensation decision that was made for a different reason.