Did you know that 90%* of the highest-performing organizations use incentives to encourage and retain employees?
And while professional growth opportunities and fair compensation play a crucial role in employee satisfaction and retention, adding other incentives (like bonuses and perks) into the mix is a great way to ensure your people are rewarded for outstanding work and motivated to perform at their best.
It’s no secret that people generally respond well to incentives. Even if your employees receive a competitive base salary, the right incentives can motivate them to take their performance to the next level.
If you want to learn more about incentive compensation, look no further. This article covers:
- What incentive compensation is
- Variable incentive compensation types
- How to design a strong incentive compensation plan
- What to look for in an incentive compensation software
*IRF (Incentive Research Foundation), 2022
What is incentive compensation?
Incentive compensation is a type of variable compensation where pay is partially tied to employee achievements — in addition to a fixed base salary. For example, part of a team member’s compensation package might vary depending on reaching sales or company growth targets.
But besides the variable compensation model we’ve just described, incentives aren’t always monetary. Giving your best-performing employee an “employee of the month” award, for instance, would be an incentive.
Popular kinds of incentives include:
- Direct commissions
- Awards and prizes
The benefits of incentive compensation
Incentivizing employees can motivate your people and help your business succeed. Incentive compensation is also pretty standard for sales teams, so competitive incentives could differentiate your company in a tight labor market. The benefits of incentivizing employees include:
- Higher productivity: When employees work towards an incentive, they may feel even more motivated to achieve their goals, resulting in increased productivity.
- Increased profitability: Satisfied employees work hard and are laser-focused on helping their companies hit targets. Incentivizing your sales team with sales commissions will motivate them to make more sales, generating more revenue.
- Rewarding top-performing employees: Show your best-performing employees that you notice their contributions and want to reward and celebrate their successes at work.
- Improved teamwork: Incentivizing employees encourages colleagues to work together. Let’s say you implement profit sharing for your entire team; as employees are splitting part of your company’s net profit, they’ll be more motivated to work as a team and drive business growth.
- Attracting and retaining top talent: Incentive compensation plans are great for recruitment and retention. Your offer may stand out if candidates see the opportunity to make more money through bonuses. Best of all, rewarding your people with incentives will make them feel valued and satisfied, resulting in higher retention.
💰 Wondering how to build a streamlined and scalable incentive compensation plan?
Use Leapsome’s compensation management tool to provide a top-notch incentive compensation experience for your people.
👉 Learn more
Variable incentive compensation types
There are many ways companies can incentivize their employees — let’s discuss the most common types of variable incentive compensation:
- Sales commissions
- Management by objective bonuses
- Spot awards
You’ve probably heard of sales commissions before, even if you weren’t aware they are a type of incentive compensation. If you aren’t already familiar, sales commission systems incentivize employees to reach targets — e.g., products sold or revenue from deals closed.
Let’s say a company sells accounting software that costs US$10,000 annually, and offers sales reps a 5% incentive for every deal they close. That means employees get a US$500 incentive every time they sell the company’s product.
If a sales rep made ten sales in a quarter, the company would pay them US$5,000 (US$500 x 10) in incentive compensation. And that can make a huge difference.
When sales-oriented organizations don’t offer commissions as incentives, some employees may become disengaged and unmotivated; after all, they know they’ll get the same salary whether they have a good sales month or not.
Management by objective (MBOs) bonuses
This incentive compensation type is a reward system where employees and their managers put their heads together and set goals collaboratively. Crucially, the objectives they come up with should always be in sync with their project and organizational goals.
For example, if you sell products or services, your goal could be to increase your sales by 5% each quarter. Or, if you work in customer service, your goal could be boosting customer satisfaction by 20%.
Employees who hit those individual and team goals will earn predetermined incentives and rewards.
The management by objectives system is strict about managers and employees working as equal partners in the decision-making process. When managers let team members shape their compensation plans, they drive trust, motivation, and commitment.
Spot awards are rewards that employers offer for outstanding performance. When someone does exceptional work, management can offer them spot awards in the form of a prize, certificate, or shoutout.
Using spot awards to incentivize employees is a great way to recognize team members and show that you appreciate their hard work.
Common scenarios where companies offer spot awards are when an employee:
- Volunteers to lead a project
- Pitches an innovative solution to a tricky problem
- Leads a company community service project
- Brings in a high-value client
There are many kinds of bonuses you can offer your people. Companies give out monetary and non-monetary bonuses in situations where they want to say “thank you” or “congratulations” to someone they work with.
Bonuses work to reward good performance, incentivize loyalty, or make a great impression on recruits. For example:
- If your company is performing exceptionally well due to a team’s contributions, you can offer those employees bonuses
- If one or more of your staff members helped you land a dream client, you could offer them a bonus
Here’s a short list of other popular kinds of bonuses:
- Joining bonuses
- Signing bonuses
- Retention bonuses
- Referral bonuses
- Performance bonuses
- Holiday bonuses
How to design a great incentive compensation plan
It’s critical to ensure you’re building an incentive compensation plan that’ll motivate your people while making certain you’re not draining your company’s budget. You need to find that sweet spot.
To design a great incentive compensation plan, follow these five steps. We’ve kept our guidance general so that you can tailor it to your company’s needs.
- Determine your business goals
- Dive deep into the different types of incentive compensation plans
- Appoint an incentive compensation manager
- Measure the success of your incentive compensation plan
- Use a reliable incentive compensation software
1. Determine your business goals
Whether you want to increase your revenue by 30% annually or retain at least 85% of your employees, get crystal clear on the objectives behind your incentive compensation plan before you start building it.
After listing your goals, prioritize them based on impact. Doing this will help you determine what type of incentive compensation will work best for your company. For instance, offering a competitive joining bonus would be a good strategy if you want to attract top talent\.
There may also be scenarios where having different incentive compensation plans would make sense, like:
- Offering existing employees a referral bonus when they bring someone on board
- Offering candidates a signing bonus when they accept a position with your company
- Offering all employees a quarterly profit sharing bonus depending on your company’s net profit
2. Dive deep into the different types of incentive compensation initiatives
Once you’ve determined the goals behind your variable compensation plan, start researching and exploring the different types of incentive compensation initiatives and think about how you can combine them.
Keep in mind that a compensation plan usually comprises several different compensation initiatives. For instance, a SaaS tech startup might have a sales commission, referral bonus, and profit-sharing scheme within their incentive compensation management strategy.
3. Appoint an incentive compensation manager
If you have the resources, we’d recommend hiring an incentive compensation manager — or promoting someone from within. This person would be responsible for strategically building and implementing your company’s incentive compensation plan, as well as monitoring and updating it over time.
Here are some of the most common roles and responsibilities for an incentive compensation manager:
- Evaluating your company’s current incentive compensation plan (if applicable)
- Collecting and analyzing data on competitors’ incentive compensation plans
- Working with HR to ensure the company has the right performance review structures and processes
- Interviewing managers, team leads, and C-level executives to gather relevant data and feedback
- Building and implementing an incentive compensation strategy
- Monitoring your incentive compensation program
4. Measure the success of your incentive compensation plan
Upon implementing your incentive compensation plan, the next step is to evaluate its success. If it’s working well, try improving it and scaling the process. If it’s not working, it’s important to discover why and figure out what you can do to improve it.
One way to do this is by returning to the incentive compensation program objectives you established at the beginning of your initiative. Remind yourself what your goals were and consider if your plan has helped you get closer to achieving them. In short, compare your incentive compensation strategy expectations with what happened in reality.
5. Use a reliable incentive compensation software
Building and implementing a scalable incentive compensation process is no piece of cake.
But equipping yourself with a reliable incentive compensation tool like Leapsome can help you easily set up scalable incentive compensation plans. Our platform’s intuitive interface, actionable data, and automations will make this process seamless — from design to execution.
With the right incentive compensation management software, key stakeholders can dive deep into analytics and make impactful, data-guided compensation decisions.
What to look for in incentive compensation software
Here are some of the main qualities you should look for when choosing the best incentive compensation software for your business:
- Easy to scale as your organization changes and grows
- Intuitive user experience
- Flexible and customizable
- World-class data privacy and security measures
- Features that let stakeholders and team members collaborate
- Comprehensive — yet easy-to-understand — reporting and analytics
Leapsome fulfills all these criteria and more, making our platform a great option for teams looking for a simple way to build impactful incentive compensation plans for their business.
Establish your incentive compensation plan with Leapsome
Incentive compensation plans are excellent initiatives for your people and your company; when done right, they deliver great benefits for team members and contribute to long-term business success.
At Leapsome, we’re passionate about helping make work more fulfilling for everyone — and compensation is part of that.
Our compensation management tool is designed to help management and HR set up effective, scalable compensation plans that enrich the employee experience, boost retention, and inform promotions.
🚀 Wondering how to build a streamlined and scalable incentive compensation plan?
Use Leapsome’s compensation management tool to provide a top-notch incentive compensation experience for your people
👉 Book a demo