Incentive Compensation: Why Your Strategy Might Include It

While almost every employee appreciates a regular paycheck, they can get accustomed to the same pay every week, month after month. Many organizations opt for an incentive compensation program as part of their total compensation strategy. An effective incentive compensation plan can produce an array of short- and long-term benefits for both employer and employee. Companies not using employee incentives could be missing out on greater productivity and stronger employee motivation. Employees could be missing out on rewards for their exceptional contributions to company success.

Here we’ll explore what incentive compensation is, why it’s valuable, and how companies can get the most out of an incentive plan.

What is incentive compensation?

Employee incentive programs are over and above an employee’s base salary or hourly wage. Incentives are performance-based, often monetary payments for reaching pre-set individual, team, or business goals or objectives. The C-suite, human resources department, and departmental managers may be key stakeholders in or responsible for a company’s incentive compensation management strategy.

Why are incentive compensation plans valuable?

Many employers subscribe to the incentive approach to compensation because it offers far-reaching advantages to the company’s growth and success. Here are 5 positive effects of effective incentive compensation plans.

Increase productivity

Incentives spark employee drive by highlighting what’s “in it for them.” Employees working harder and more diligently to reach their goals are typically more effective.

Boost motivation and engagement

It’s easy for employees to settle into routine ways of doing things that aren’t as passionate or efficient as they could be. Incentives are the “dangling carrots” that may inspire them to be more creative and resourceful. They may resolve to complete their tasks quicker and find ways around bottlenecks and other obstacles.

Encourage teamwork

Tying financial rewards to outcomes improves team performance. It motivates individuals to contribute more diligently to team projects, collaborate with team members, and deliver quality work on time.

Foster leadership thinking

Incentives based on the company’s goals show employees their efforts make a difference in the broad initiatives. By benefiting when the company succeeds, they’re more likely to consider the big picture rather than focus only on their smaller part.

Types of incentive compensation

Not all incentive plans are created equally. The type and amount of incentive usually hinges on the job position and the incentive’s goal. While the following list isn’t exhaustive, it contains some of the most common types of employee incentives.

Monthly, quarterly, and annual incentive

Employers may offer time-based incentives with performance measures to be met during that time. These may center around an individual employee’s accomplishments, team goals, or company-wide objectives.

Project bonus

Project-focused work can be rewarded by project bonuses. These incentives may be rewarded when teams hit certain milestones within the project and when the project is completed on time and within budget.

Sales incentive

A company’s sales teams may receive the most opportunities for incentive compensation. In addition to salary and commissions, individual and sales team incentives may be offered as part of the total sales compensation plan. Sales reps can be enticed to open new accounts, manage a certain size book of business, or increase their sales volume. Sales management personnel can offer input for the company strategy involving performance criteria, tiers of incentive payments, and more.

Team goal incentive

Teams that work together and meet certain objectives can receive team bonuses. These may be set in advance or work as variable compensation, depending on the performance criteria. These may be one-time or ongoing incentives.

Retention bonus

Avoid turnover, especially during talent shortages, by proactively offering retention bonuses to keep employees on the job. These are most effective when paid at intervals on a sliding scale. They may also be referred to as longevity bonuses.

Company goal bonus

When the company increases its profit margin, grows its sales numbers, or improves its revenue, every company employee benefits with a company goal bonus. This incentive may be rewarded as a check or as a contribution to the employees’ retirement or profit sharing accounts.

Getting the most out of an incentive compensation plan

Organizations that take the time to craft an incentive compensation program should take these steps to ensure it accomplishes its goal.

Clearly communicate the plan

If there’s any hint of ambiguity or vagueness, the incentive plan may not be embraced by employees as it should. Lay out the terms of the plan, its specific goal, the time frame, and the reward. Good communication sets the process off on the right foot and maximizes the chances of success.

Share frequent updates

Employees should never wonder where they stand with incentive compensation plans. If yours centers around individual performance, give updates in one-on-one meetings. Share team or company-wide incentive progress during team meetings or in your company’s communication app.

Provide accurate results and timely payment

Never leave employees wondering if they’ve earned or when they’ll receive their incentive compensation. Calculate the results, announce the rewards, and dole out incentive payments as quickly as possible. Being too slow with the award can demotivate employees to engage in future incentives.

Incentive compensation plans offer enormous benefits to organizations and their employees

Understanding what incentive compensation is and how to use it effectively as part of a total compensation plan is essential. Used wisely, they can motivate employees, facilitate ownership thinking, decrease turnover, and fuel company growth and revenue.

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