What is incentive compensation? Incentive compensation, or incentive pay, can be defined as a type of variable compensation that is awarded to employees when they have completed a specific set of performance objectives.
Often described as “performance-based pay,” a “bonus,” or a “reward,” incentive compensation is specified at the beginning of a pay period and is meant to inspire above and beyond performance in order to achieve the potential payout.
Types of Incentive Compensation
Incentives can be broken down into two categories: casual incentives and structured incentives.
Casual incentives are rewards and recognition on a smaller scale, such as a non-monetary gift or small cash bonus for reaching a goal. They can be granted at any time, and are usually a less formal type of incentive payment.
Structured incentives are well outlined as part of incentive payment programs and typically include a monetary award paid at a percentage rate of an achieved sales or production target.
Incentive Compensation Examples
When it comes to the types of incentive pay that companies offer employees, there is a wide variety of options.
Different rewards are known to inspire different levels of motivation, and businesses have to make calculated decisions when choosing the most effective form of compensation. The goal is to invest in a reward that helps raise productivity without decreasing overall profit.
Incentive pay examples that are cash-based include:
- Quarterly or yearly bonuses
- Commission for a sales role
- Sign-on bonuses or performance bonuses
- Company stock shares
- Company branded debit card rewards (commonly used for rebates)
Incentive compensation options that are not cash-based include:
- Larger scale incentive travel or excursions
- Company lunches
- Merchandise rewards as part of an online reward points program
- Gift card reward options to top retailers and name brands
- Membership to a health and fitness club
Cash options can be paid in a lump sum once goals have been met, or after a certain time period has passed. While these rewards are not part of a base salary, it is common for these options to be viewed as part of overall compensation.
Non-cash options, such as points rewarded at the time of a sale, take a little more management as they are awarded more frequently, or require planning (travel). Because these rewards are not considered as part of compensation, businesses can control the cost and variety of these reward options without making employees feel under-served should the market take a turn for the worst.
When should companies consider offering incentive compensation?
It’s simple: top companies have happy, well-compensated employees. Depending on the industry and structure of the business, companies can use incentive compensation in the following situations:
• An employee reward and recognition program for all employee types as a means to boost morale, decrease turnover, and increase performance at any business. Different departments can have different goals with the help of organizational structure software.
• A sales incentive program for businesses looking to offer both commissions as well as added bonuses to a small portion of top performers. These programs can engage team members in healthy competition with automated tracking and an online leaderboard.
• A channel incentive program for businesses with a product that is sold through a variety of different distributors, wholesalers, and resellers, or who’s product can come recommended to the consumer by dealers and contractors.
Due to the nature of these programs, companies often seek out incentive program providers to plan corporate events or provide software for tracking and rewarding employees.
Looking for more information on incentive pay?
Business goals are unique, and no two incentive pay plans are exactly alike. Check out these case studies to see how other businesses have implemented incentive plans, or visit our website for more details on incentive reward options.
