Employers may offer employees financial or similar awards in addition to a base wage for their performance, or they may work as part of a team to incentivize employees to produce greater results when selling items or delivering customer service. When looking for a job, understanding pay structures with incentives can help you compare different compensation techniques. In this post, we define incentive pay, discuss the various forms and structures, explain why employers give it and address some frequently asked questions.
What is Incentive Pay?
Incentive pay is a financial reward for performance rather than compensation based on the number of hours worked. The premise is that the promise of cash compensation will inspire employees to meet particular performance or financial goals. Commission for sales workers is a prevalent kind of incentive pay in which they receive a portion of each sale they make.
Incentive pay is often a monetary reward, but as an employer, you can also provide non-monetary incentives, known as casual incentives. This could include items like presents or dinners that have previously been paid for by the company. Employees may also be given the chance to purchase stock in a company.
When Might You Consider Offering Incentive Pay?
You may provide incentive pay to your sales team if they hit particular targets, or you could offer it to your senior management team to retain key employees. You may desire to consider offering incentive pay to all staff in order to enhance productivity and general morale, but if you do, you must analyze the basis on which incentive pay will or will not be provided.
Setting up an incentive pay program must be properly thought out in order to be motivating and deliver recognition. Without sufficient transparency and careful study, such a program risks being divisive and demoralizing.
It’s a good idea to apply the SMART system when developing an incentive pay scheme, which stands for specified, measurable, achievable, realistic, and time-limited goals.
Examples of Incentive Pay
There are various sorts of incentive pay – cash, shares, or other incentives – and you must decide which is best for your company.
#1. Cash
One of the most prevalent types of incentive pay is cash, which provides employees with additional financial rewards in addition to their salary or earnings.
Sales commissions are quite popular and are often set at a flat percentage of sales. It can also help to prevent salespeople from cutting corners. Employees who produce a lot of sales can earn significantly more than their base income. However, if some employees believe they are putting in more effort than others, this can be a disincentive in situations when a team effort for sales is essential.
If your company is focused on production, you can issue incentive payments based on the amount of product produced. If no payment is made, no payment is made. This could lead to a more efficient production process. It can, however, lead to lower quality if personnel attempt to exceed production targets and cut corners to do so.
You can offer one-time bonuses for one-time improvements, which can work effectively with non-sales personnel individually or as part of a team. However, it is critical to audit the improvements to ensure that they have occurred, especially since they may be less tangible than sales targets. If you offer it as a team, you must also ensure that each member is doing their part.
Performance-based pay can be given based on how well an employee performs over a specific period of time. To avoid charges of favoritism, the targets you set must be realistic and objectively measured.
#2. Shares
You can also give your employees stock options instead of cash, however, this is more complicated. It can help to connect employees to the organization and foster long-term commitment. You essentially grant your employees the right to purchase shares in your company at their current price at a later date. They will have made a profit if they have increased by the time they execute their share options.
#3. Additional incentives
Instead of cash, you may offer a non-monetary incentive such as a corporate car, healthcare or health club membership, or vouchers to be used on something specific.
What Types of Incentive Pay Programs Should You Provide?
In almost any aspect of your organization, incentive pay can be applied.
Consider structured incentives to be an investment in a particular business outcome. Create incentives that direct your employees’ time and brainpower toward achieving essential long-term or short-term goals. Casual incentives are a versatile tool for rewarding great performance, innovation, leadership, or any other characteristic you want to emphasize.
Here are five examples of incentive pay systems that you can put in place right now:
#1. Employee recognition and awards
Employee recognition programs are not the same as employee reward programs, despite the fact that the two terms are sometimes used interchangeably. Both can provide both informal and structured incentives.
- Financial benefits are provided by reward programs. Employee incentives programs engage employees by providing them with the opportunity to earn money or benefits in addition to their normal wage and merit pay increases. Annual cash bonuses, for example, augment guaranteed salaries, allowing companies to enhance compensation based on yearly success.
- Programs of recognition bring psychological benefits. Employees are motivated by recognition programs that recognize and celebrate exceptional work. For example, an employee-of-the-month program recognizes an individual for outstanding performance but may not include a monetary prize.
A well-rounded employee recognition and reward program combine the two. They offer a game-like element to the working while reminding employees that they are valued, helping to boost workplace morale.
#2. SPIFF Initiatives and Sales Incentive Schemes
An incentive pay plan pays salespeople or sales teams who meet or surpass predetermined goals. They have the opportunity to earn more cash or other rewards in addition to their normal compensation or salary.
Sales incentives are typically established systems of commissions or cash bonuses, but you can also provide ad hoc benefits and perks.
SPIFF programs are a type of short-term sales incentive program that many businesses use to sell difficult-to-move products or raise sales in a short period of time.
#3. Wellness and health incentive programs
Employee health and wellness incentive programs are becoming more popular in businesses. Employers, for example, could offer to pay a bigger percentage of healthcare expenditures for all employees who exhibit year-over-year improvements in key health measures such as blood pressure, cholesterol levels, or body mass index (BMI).
Another example: If the team signs ten high-value customers by the end of the quarter, everyone receives a $500 prepaid card to spend on anything that helps them relax – a massage, a spa day, a yoga session, etc.
Why would a company wish to operate such a program?
Health insurance premiums are frequently among the most expensive corporate expenses. You may promote healthy lives by:
- Limit annual rises in healthcare costs.
- Reduce the number of workers’ compensation claims.
- Reduce employee absences due to illness or injury.
#4. A channel incentive scheme
Channel incentive schemes use incentive pay to reward company partners such as distributors, retailers, and other affiliates. They are rewarded when they meet predetermined objectives. For example, you may provide:
- New customer incentives
- Volume discounts
- Funds for development
- Sellers that move a particular amount of product are given sales incentives.
#5. ESG programs (environmental, social, and governance)
Environmental, social, and governance issues are increasingly being incorporated into incentive schemes. ESG initiatives seek to have a beneficial impact on the world at large. Among the top ESG priorities are:
- Slowing and reducing climate change’s effects
- Improving Medical Access
- Plastic waste reduction
These intangible characteristics may be more difficult to quantify, but rewards reinforce business values and culture. Employers, for example, may provide paid time off to employees who volunteer in their communities.
How Do You Create an Incentive Pay Scheme?
Create an incentive pay plan that is customized to your individual needs:
- Workplace culture
- Employees
- Organizational objectives
No single strategy will work for every business. Take the time to figure out exactly what you want to achieve and the best strategy to get there.
Bear in mind:
- Align the purpose of your incentive pay program with the goals of your firm.
- Define success from the start.
- Determine the most effective strategy to motivate staff to reach their objectives.
- Refine these goals and divide them into specific targets for staff.
Keep in mind that not all objectives must be linked to firm earnings and losses. Values-based programs are becoming more popular. In order for incentive pay to be a successful motivational tool, certain organizational, motivational, and behavioral principles must be followed.
#1. Organizational Principles
What will you measure, and how will you measure it? What constitutes employee success?
Individual or group quotas, for example, would most likely be established when developing an incentive pay plan for a sales force. But how can you quantify other types of achievement and other departments’ goals?
And how can you ensure that your targets and incentives actually encourage conduct that is consistent with your company’s beliefs and goals? Sometimes reward systems backfire, inciting risky conduct and encouraging harmful competition or unethical actions.
One of the most prevalent issues that goal-setters of all stripes face is ambiguous or too utopian targets or measurements. Make sure the goals you set are SMART:
- Specific
- Measurable
- Achievable
- Realistic
- Time-based
Your employees must understand what success entails, when the deadline is, and how to track their progress. Ensure that workers are also in control of their outcomes. You will frustrate everyone concerned if you misunderstand areas of responsibility.
#2. Motivational Principles
What motivates your employees? Do they desire greater recognition, more freedom, or more cash?
Again, even if you already know, ask people what they want. People are more likely to invest in ideas to which they believe they have contributed. When polling employees, make it clear what is and isn’t on the table – and for whom. Your incentive pay design should take into account the following factors:
- Levels
- Access
- Experience
- Departments
As you separate the incentives provided to different jobs, be fair and honest.
#3. Behavioral Principles
The Society for Human Resource Management and consultant Aubrey Daniels gives a variety of behavioral elements to consider when developing your pay structure and rewards. Their knowledge can be reduced to the following rules:
- Be objective: Or, more accurately, understand that humans are incapable of being fully objective. Avoid subjective measures like performance reviews as much as possible in favor of quantifiable results. Make sure everyone on your team understands your goals and incentives. Transparency also protects you from unintentional discrimination or other unfair acts.
- Be understandable: Complicated incentive schemes just confuse individuals. The pay scheme should be straightforward enough for a seventh-grader to understand. Replace after-the-fact bonuses with “pay for performance.” While bonuses can enhance morale and encourage hard work, they cannot inspire employees in the same way that a known reward does. Provide employees with an objective to shoot at and a compelling motive to do so.
- Be thorough: Consider potential ramifications and adjust your goals accordingly. Avoid too simplified aims, which might backfire by instilling bad habits.
- Be consistent: Shorten the time periods for which you measure performance. Instead of reviewing personnel on a yearly basis, divide goals into smaller portions. For one thing, regular quotas — or other targets — provide staff with real feedback that they can act on right now.
- Be consistent: Make the rules and follow them. Nothing undermines employee trust faster than constantly shifting policies and compensation methods.
- Be informed: While you don’t want to modify your aims and strategies in the middle of the process, you must be aware of metrics and changing industry conditions. Depending on the numbers, you may be forced to adjust or cancel your program.
Is Incentive Pay Effective?
Yes, incentive pay works, especially when benefits are considered to be scarce. People are more inclined to view incentive pay to be guaranteed pay if it is constantly available.
Consider the advantages of incentive pay to better understand why.
Benefits of Incentive Pay
A well-designed incentive pay structure should propel both your employees and your company ahead. Pay with incentives:
- Aligns the interests of employees, partners, and vendors with the aims of the firm
- Defines what is vital for your company.
- Allows your employees to enhance procedures and systems in order to meet your objectives.
- High achievers are rewarded.
- Creates a culture of teamwork and performance.
- Encourages employees to continue growing their talents in order to meet their objectives.
- Employees are professionally and intellectually stimulated, which can reduce attrition.
All of the aforementioned factors contribute to a better product or service and a better client experience. Finally, these efficiencies and improvements translate into measurable top- and bottom-line growth.
Drawbacks of Incentive Pay
Every strategy involves some level of risk. All of these hazards, however, can be avoided when carefully designed and monitored.
- If your program is competitive, it may cause conflict among employees. Unhealthy competitiveness and jealousy can have a negative impact on morale, engagement, and production. To overcome this, create initiatives that unite rather than divide teams.
- Employees may disregard responsibilities that are not linked to rewards. In this case, assist employees in understanding why their responsibilities are vital and how they can indirectly affect their overall progress toward rewarded goals.
- Employees may be encouraged to undertake overly aggressive sales tactics or unethical behaviors as a result of incentives. This can be avoided by specifying acceptable conduct or processes for an incentive scheme.
- Wage discrimination may occur in incentive pay programs that do not define success criteria. For example, if bonuses are dependent on performance reports, the award can be influenced by the personal biases and affiliations of supervisors.
Is Your Incentive Pay Taxed?
Yes, according to the IRS, incentive bonuses are considered supplemental income and are taxed at both the federal and state levels.
How Is Incentive Pay Determined?
Structured incentive pay is determined as a proportion of achieved sales or production goals. The amount paid is determined by the company’s performance measures and achieved targets.
Is It Mandatory for a Corporation to Pay Incentive Pay?
No, incentive pay and business bonuses are considered additional income and are paid at the organization’s discretion.
Why Do Businesses Provide Incentive Pay?
Companies use incentive pay to raise productivity, sales, retain important staff, and boost employee morale.
Is an End-Of-Year Bonus Considered Incentive Pay?
Yes, any form of firm bonus qualifies as incentive pay.
- Employee Incentive Programs: Benefits For Your Company
- EXECUTIVE COMPENSATION: What Is Executive Compensation
- WORK PERFORMANCE GOALS: How To Set Them With Examples
- WHAT ARE INCENTIVES?
- SALES GOALS: Definition, Examples, Smart Goals & How to Set It
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