Incentive Compensation: What It Is & How to Implement
By Moradeke Owa
| Last updated:
Nov 30
|
9 min read
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Typically, incentives are rewards that people receive for completing a specific task. Incentive compensations are financial rewards given to a salesperson for meeting or exceeding their quota.
Giving individual or teamwide incentives motivates your sales team to meet and even exceed their quotas, increasing the company’s revenue.
Here’s a guide on what incentive compensation is and how to design an effective incentive compensation plan to motivate your sales team.
Organizations provide salespeople with incentive compensation by linking their income to their individual sales efforts and the revenue they bring into the company. Sometimes incentive compensation is calculated based on the success of the entire sales team’s performance or the overall company’s sales.
Depending on the organization, the incentive compensation could be the salesperson’s entire income (commission income) or additional rewards. Without individual and sales effort incentives, the sales team may be less motivated to meet their targets.
People who meet their quota, for example, could receive a thanksgiving or Christmas bonus. Most people would strive to meet their quota because they want to celebrate the season, so the bonus would be welcome.
Incentives are an excellent motivator for employees to perform admirably in their roles. It enables sales representatives to be proactive in closing deals and meeting company goals.
An upside to setting specific targets for sales reps to meet is that it drives them to maximize resources such as going after big clients, allowing them to meet their quota faster. Working with large clients improves your company’s reputation, and bigger clients will be more willing to work with you.
Outstanding salesperson performance usually translates to massive profit for the company. The entire sales department is diligently working to close deals, so the chances of you generating more revenue than you would without incentives are extremely high.
Also, when you launch new features or products, sales reps are motivated to upsell to users and generate more revenue from the money users pay for the additional features.
There are various types of incentive compensation but the following are the most common examples:
The company shares a percentage of its profits with employees who meet their quota under this plan. This is a fairly common method because the greater the organization’s profits, the greater the employee reward, which is a good motivator to push employees to overperform and generate massive profits for the company.
For example, if an employee brings in a certain number of paying clients for the company, they are entitled to 3% of the company’s profit in addition to their salary.
When this method is used to pay employees’ entire salary, they are motivated to meet their quota all year to have a stable income.
A retention bonus is an incentive given to employees by organizations as a result of their time with the company. For most businesses, a retention bonus is given as salary raise.
A company, for example, could decide to raise its employees’ salaries by 20% at the end of each quarter.
Most businesses use this method of incentive compensation because it promotes employee loyalty. When there is a clear structure for employee pay increases, they are more motivated to stay and develop their skills with the organization.
Profit-sharing incentive compensation provides employees with a fraction of the organization’s profit if the company’s profit reaches a certain threshold. This method is similar to gainsharing, but instead of sharing company profit with employees based on employee performance, it’s based on company performance.
For example, if an organization’s quarterly target is $1 million and the profit target is met, employees receive 7% of the profit.
Companies use incentive compensation to encourage teamwork among their employees. If the profit is shared by all employees, then all employees are more likely to work hard to get a raise.
In most cases, the percentage distributed to all employees is determined by their contribution to the revenue generated; for example, the sales and marketing team may receive a larger share of the profit than other teams.
Spot awards are small bonuses given to employees who outperform their peers over a specific period. Most businesses use this type of incentive compensation to encourage healthy competition among employees.
The employee of the month is a good example; the employee who performs the best receives the award. Naturally, most employees are motivated to earn the spot for the recognition and incentives that come with it.
Annual incentives are typically end-of-year bonuses given to employees for exceptional performance throughout the year.
Some companies provide annual incentives to all employees as a retention bonus, while others base it on employee performance. In any case, the organization is rewarding its employees for their loyalty and commitment to the company.
The first step in creating an effective incentive compensation plan is to establish the foundation for it. You must establish guidelines for how incentive compensation works and effectively communicate them to employees so that they understand the requirements to be eligible for the incentives.
Employees often do not understand what is expected of them when they are given unstructured incentive compensation. As a result, they have no idea why they are working so hard, which isn’t a good motivator.
It may also make the incentive compensation system appear untrustworthy, leading employees to completely disregard it. Here are the characteristics required to create a successful incentive compensation plan:
The primary goal of incentive compensation is to motivate employees to meet specific goals and increase the company’s bottom line. An effective incentive compensation plan aligns with the company’s desired goal.
As a result, you must first specify the goals you want your organization to achieve before tailoring your incentive compensation structure.
For example, your company’s profit target is $400,000, so you reward the employee who meets this target with 2% of the profit.
The chosen incentive compensation plan should align with the company’s work culture, employee interest, and industry type.
For example, a SaaS company’s incentive program may be based on how many demos the sales rep did. While a fintech company’s incentive program may be based on the number of users the company can gain over a certain period.
Employee interest also plays a significant role in the type of incentive compensation plan you select. A junior sales rep, for example, may be more motivated by spot awards and retention bonuses, while a senior sales rep may be more motivated by gainsharing and annual incentives.
After developing your incentive compensation plan, you must continuously monitor its impact on company revenue and employee morale. Performance reports allow you to identify the highs and lows of the incentive compensation plan and the reasons for them.
Reviewing performance reports also enables you to track employee KPIs to the company’s KPIs. This demonstrates the impact of employee performance on overall company performance.
If there is a proportional relationship between impressive employee performance and company performance since you implemented the incentive compensation plan, you can be confident that the plan is working.
Employees should be able to understand a good incentive compensation plan. They should not be confused about their incentive amount and the requirements to qualify for it.
Also, the clearer your incentive plan’s terms and conditions are to the sales rep, the more effectively they can achieve it. If they have any questions, answer them explicitly so they understand what to do.
Also, no matter how ambitious your company’s goals are, they must be achievable by your sales representatives. Generous incentives may not be enough to motivate employees to accomplish unrealistic goals.
Unrealistic targets will have sales reps working round the clock with a very slim chance of success. So employees may perceive the incentive compensation plan as a ruse to induce them to overperform without rewards.
The purpose of regular reports is to use them to assess how the accomplishments of the incentive organization. Evaluating these responses will help you determine whether your current strategy is working or if it needs to be revised.
As an organization, you require an incentive compensation plan window; when this period expires, you examine the reports to determine whether or not to continue with the current incentive compensation plan.
The evaluation should not only be based on individual performance, but also on the performance of the sales team, and the company’s overall performance.
The evaluation should also include employee well-being and morale. They may be meeting their quotas, but they are under severe stress, so they are unengaged, and they may leave your organization when they become fatigued and can no longer meet their quotas.
Aside from the sales team’s efforts, other factors such as economic and market conditions affect a company’s revenue. Put these factors into consideration when evaluating the overall company’s performance.
An effective incentive compensation plan needs to be improved continuously. Regular evaluation helps you to understand the best incentive compensation plan for your employees and the company.
When you’ve determined what works and what doesn’t in your plan, you can use it to optimize your current plan and meets the stakeholders’ targets.
CaptivateIQ is one the most popular incentive compensation management software. It helps you automate and implement incentive compensation plans.
You can generate sales rep performance reports, analytics on sales performance, and automate employee incentives.
Quotapath enables you to track commissions, create compensation plans, and automatically distribute compensation to your salespeople. It also integrates with CRMs such as Hubspot, Salesforce, Zendesk, and others to provide a clear picture of closed deals and sales rep contributions to revenue generated.
Xactly Intent is a powerful incentive compensation management software that automates incentives and tracks sales efforts. It’s also mobile-friendly, allowing the sales team to keep track of their commissions, closed deals, and ongoing deals from any device.
Spiff provides sales reps with a personalized dashboard that displays their closed deals and the commissions associated with them. You can also use it to automatically restructure sales rep commissions on deals without having to do the math yourself.
Everstage is an easy-to-use software that allows you to create incentive compensation plans and track sales reps’ progress toward meeting their quota. You can also change the commission based on the performance of the sales rep.
You can also use Everstage to adjust the employee commission without having to do complex calculations and reward your sales rep accordingly.
For example, a sales representative who meets their quota will receive 2% of the company’s profit. If you want to increase compensation for those who exceed their quota by 0.5% of profit, you can use Everstage to do so by simply specifying the percentage.
An effective incentive compensation plan motivates employees to put in their best and meet the company’s sales targets. Incentives also demonstrate your appreciation for the hard work sales reps put in to meet lofty goals.
The effectiveness of incentive compensation plans is also affected by the industry, employee interest, and company culture. The best way to ensure that your company’s revenue increases through incentive compensation is to select an incentive plan that is appropriate for your organization and its employees.
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