What Is Incentive Pay (And How To Implement It)

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Incentive pay is usually tied to performance or achieving pre-defined objectives and is a way for employees to make additional income or get a bonus. It’s designed to provide motivation or incentive for employees to work harder, which is why it’s called incentive pay. It can be a great way to boost morale and sales, but there are downfalls too. Read further to learn more.

Key Takeaways

• Incentive pay is a way to reward employees financially for hitting a goal or performing in a certain way.

• There are two types of incentive pay: structured incentives and casual or impromptu incentives.

• Incentive pay is not the same as being paid a commission.

• There are positives and negatives to incentive pay.

• Structuring an incentive pay program correctly is the key to success.

What Is Incentive Pay?

Incentive pay is separate from a regular salary or hourly wage; instead, it’s considered merit-based compensation. Incentives can take forms other than payment or monetary compensation within a company. This can prove to be beneficial because it keeps things interesting and adds a level of the unexpected.

Incentives can also be given to individuals or groups; in fact, some companies use incentives to reward their vendors, affiliates, or other outside agencies that are a part of the business structure. No matter who is getting the reward, incentive pay usually falls into one of two categories, structured and casual or impromptu incentives.

How to Implement Incentive Pay

The trick to managing incentive pay in a way that limits the downfalls and makes the most of the benefits is to properly structure your incentive pay program. There are some key elements that need to be in place to make an effective incentive pay plan.

• Agree on goals. Leadership in the company needs to get together and decide what the goals will be. They could be production-based, attendance-based, or customer based – the goals are almost limitless, but they need to be defined, and there needs to be a consensus.

• Set measurements. To achieve a goal, you have to be able to measure it. If there isn’t a way to measure it, then it’s not an appropriate goal for an incentive program. It helps if everyone in the company or everyone who is participating can also see these measurements regularly to gauge performance.

• Tie incentives to specific goals. Saying you’ll reward someone for improved productivity isn’t specific enough. You’ve set the measurements; the next step is to agree on an exact goal that you’re looking to achieve.

• Communicate the plan. Everyone who is eligible needs to understand specifically what the goals are, how to achieve them, how they know when they have achieved them, and what the incentive is. It must be spelled out specifically, so there are no misunderstandings.

• Be ready to adapt. If the goal is too easy, you’ll need to adjust it for future attempts. If it’s too hard, you’ll have to make it easier. There will be a learning curve with an incentive plan, so being flexible and ready to adapt prepares you to get it right.

• Cap incentives. Regular incentive pay becomes part of the expected income, and it loses its power. Capping the amount someone can earn and how often they can earn it helps keep incentives fair. Capping the requests can also prevent employee burnout and unwarranted stress and pressure to perform.

Incentive pay can be a very powerful tool if it’s put together in a fair and structured way. It can also be a great benefit if it’s done in an impromptu and casual way. Both approaches require certain steps to make sure everyone is on the same page, and you’re charting fair goals. When it’s all established, it’s time to sit back and take note of what works and what doesn’t for your company.

Structured Incentives

Structured incentives are well-established and occur regularly. Many people think of them as part of their pay and know what they’re working toward as they’re hitting goals. There are many benefits to this type of incentive program, including:

• Improved productivity. As people work harder to hit goals, the company reaps the rewards.

• Improved profitability. Like improved productivity, some companies gain more financially from encouraging employees to work harder.

• Rewards are merit-based. This eliminates the suspicions of biased bonuses and financial awards going to people who don’t earn them.

• Support business goals. When you’re upfront and honest about what you want your employees to achieve, it’s easier for them to get on board and toe the line.

• Improved teamwork. When there are team incentives, this can bring people together and encourage them to work in a cohesive manner.

• Improve morale. People are not only happier when they’re earning extra money and other incentives, they feel good when they’re rewarded for their efforts.

Casual or Impromptu Incentives

Rather than regularly offering incentives, some companies prefer to have their incentive pay come on a more unexpected or impromptu basis. Casual incentives can include pay or bonus money, but they often feature other rewards like a team celebration, additional time off, a good parking spot, a gift card or basket, etc.

These are not incentives that employees expect or consider part of their regular pay because they typically don’t know when they’re going to occur. The great thing about these is that they can be used in conjunction with structured pay incentives, and they have all the same benefits. They’re also very useful if there’s a huge project or time crunch that a company is trying to meet.

Is Incentive Pay the Same as Commission?

It’s easy to think of commissions as incentive pay and vice versa, but they’re not the same thing. Commissions are part of the established pay structure, and they’re usually tied to sales jobs.

A commission is a financial percent or dollar amount for sales. For instance, a salesperson may earn a base salary and then get a 20% commission on the profits from every sale they make. It’s not quite the same as getting a set amount for hitting a sales quota.

In addition to incentives and commissions being based on different goals, they’re typically handled differently, with the incentive being a motivating factor during certain time periods and recognition of extra work. The commission becomes seen as a routine part of the pay, and it’s expected. There’s often a disappointment when it’s not achieved. Incentive pay doesn’t have the same psychological impact.

Does Incentive Pay Work?

If your goal as a company leader is to get your employees more engaged and boost productivity, then incentive pay can be very beneficial. Not only does it get people engaged and boost productivity, but it can also bring a group of employees together, reduce company turnover and burnout, and it can strengthen company culture.

Downfalls of Incentive Pay

While there are many benefits to incentive pay, there can be some downsides. Interestingly, the benefits and negatives can be individually based and affect different people in unique ways. Downfalls for some include:

• Creates tension. Whether your employees are working as a team or individually, there can be negative competition and tension that arises from struggling to achieve incentive pay.

• Seen as manipulation. If a company offers incentive pay but never actually gives it because the goals are ridiculous, many will see this for what it is, a way to boost productivity by manipulating your employees.

• Increased stress and pressure. If there are constant goals to chase, then there’s a perpetual state of stress on employees, which can have negative consequences.

• Competition trumps quality. In some situations, the desire to turn out large amounts of products rather than good products becomes the goal.

Incentive Pay FAQ

1. What is incentive pay?

   Incentive pay is merit-based compensation outside of your regular salary or wages. Incentive pay is often tied to specific achievements and hitting performance goals. It’s often offered by employers to get through a particularly busy time or to boost overall performance and morale.

2. Is incentive pay the same as being paid on commission?

   No incentive pay and a commission-based salary are different. The main difference is that a commission-based salary is part of your regular pay. Incentives are seen as a bonus that’s given above and beyond your normal pay.

   Where it really gets confusing is that an incentive pay can be a commission. For example, if you’re getting a bonus for all sales in June and that bonus is 20% of the profits from your sales, your incentive is based on commission. The determining factor is if that commission is part of your regular salary or not.

3. Are incentives used regularly or irregularly?

   There are two types of incentives, structured and casual or impromptu. Structured incentives occur regularly, while the others occur sporadically. Both can be very effective, and you can use both types at the same time in the same company.

4. Do people like incentives?

   Many people do like incentives, and others do not. Just as all people are different, some find that incentives feel stressful and cause unnecessary competition. Other people enjoy the challenge and like being rewarded.

5. What are the benefits of incentive pay?

   Incentive pay programs can have many different benefits; the biggest is that management can pick the goals they want employees to achieve. In addition to hitting targets and management-defined goals, employees often enjoy being rewarded, and incentives can build team spirit and morale.

Author

Kristin Kizer

Kristin Kizer is an award-winning writer, television and documentary producer, and content specialist who has worked on a wide variety of written, broadcast, and electronic publications. A former writer/producer for The Discovery Channel, she is now a freelance writer and delighted to be sharing her talents and time with the wonderful Zippia audience.