What is Incentive Compensation?
Incentive compensation is a type of pay structure that is based on how the business or employees perform. With this kind of a pay structure, employees may receive a base salary and extra reward for meeting a specified target. There are multiple performance measures that are used to determine who qualifies for an incentive.
Businesses use an incentive compensation plan to highlight the type and amount of reward each employee is supposed to receive for meeting the set target. When thinking about the incentive pay plan to adopt for their employees, companies have various options. These may include performance bonuses, stock options, profit sharing and merit-based raises, among others. Companies can also give employees non-monetary incentives like paid vacations and some days off.
Reasons for Using Incentive Compensation
Businesses have used incentives to motivate workers to perform better. Incentives push employees to give their best so that they can meet targets. This is because if they do not meet their quota, they will not receive the extra payment. For a variable pay to work effectively, employees need to understand what they need to do to qualify for the incentive. Of course, the desired behaviors are within the control of sales reps. Companies may also use incentive compensation to:
- Attract and retain top performers
- Align employee interests with company goals
- Encourage involvement by employees in the company’s mission and vision
- Boost productivity and profitability
Benefits of Incentive Compensation Plan
It’s important to note that incentive compensation is an effective tool for driving any desired behavior in employees. All an employer needs to know is the kind of behavior they want to promote in their employees and incentivize that. Otherwise, incentivizing a wrong behavior can lead to the wrong results. So, what are the benefits of a variable pay?
- Companies can align incentives with the business objectives
- Businesses can use incentives to meet their short-term and long-term targets.
- The company decides the kind of behavior they want to drive and focus attention on that.
- Funds are available when goals are met. This will save the company costs related to salary raises.
- It encourages companies to plan ahead and highlight their expectations
- It helps businesses to recruit better candidates.
Creating Incentive Compensation Plan
Creating an effective incentive compensation plan can be tedious. It will need to meet the tax and legal requirements. Additionally, you need a plan that’s attractive to the best talent whilst driving the right behavior. If you want to use it for the long run, such a plan should allow adjustments for when the business goals or operating environment changes.
It’s also crucial to appreciate that incentive compensation plans can become complex. This is because they involve multiple performance measurements and different categories of rewards for different levels of employees. Managing the different pay parameters can be difficult and costly especially if you rely on spreadsheets or manual systems.
All in all, an effective incentive plan is invaluable to the success of a company. The good news is that companies no longer have to worry about implementing a variable pay no matter how complex it is. With a robust compensation automation system, it’s now easy to monitor and report incentives real-time keeping the compensation program more visible to both employees and companies.