What moral hazards are present with salaried employees?

A moral hazard occurs when a party acts differently knowing that he or she is protected from any kind of risk. This is a frequent issue when it comes to salaried employees. In this case, the employer asks the employee to sign a contract, for which the employer will incur the risk. A common example is a sales employee who is paid a flat salary regardless of sales. Insurance companies are another example, because they often provide payouts when a car accident occurs, which means the insurance companies incur the risk for damage due to reckless driving.

Moral hazards arise any time two parties sign a contract, and can create problems between an employer and salaried employees for a number of reasons, the most common being lack of good faith. A moral hazard can create a great risk due to the possibility of the contract containing misleading information regarding assets, credit or liabilities.

The good news is that there are ways to reduce the risk involved with the moral hazard of salaried employees. When implementing these factors it is important to acknowledge benefits for both parties. For example, if a company hires a salesman, perhaps instead of putting him or her on a flat salary, the employee should be compensated through a base pay and commission. This way, the employer is not the only party incurring the risk. If the salesperson has to meet some of his or her financial needs through earning commissions, he or she will not only be motivated to make money, but to sell the company's product, which in turn means gains for the company. This is a win-win situation.