What is incentive pay?

Incentive pay is a form of compensation employers choose to offer employees as a way to motivate high performance. In other words, incentive pay is separate from base salary in that it is designed to encourage—it is not a mandatory form of payment by the employer nor is it a given bonus for the employee. 

Differentiating bonus vs. incentive

The term “bonus” is often used interchangeably with incentive. It’s best to think of incentive as the umbrella term that some bonuses live underneath. When a payment is tied to an established performance metric such as a Key Performance Indicator (KPI) or Management by Objectives (MBO), you may see either the term incentive or bonus involved.  

However, it’s more common to see the term bonus being used in reference to items events like a holiday or a bonus after a profitable year—both of which are not necessarily quantitative. On the other hand, the term incentive is more so used for compensation intended to drive future performance. For example, employers may provide company lunches as part of their incentive payment plan, one way to maintain employee satisfaction and well-being.  

Incentive pay models: When to offer incentive pay 

Broadly stated, a major perk of incentive pay is in keeping employees happy and motivated. Most organizations will utilize them to compete for top talent, combat employee turnover, and/or motivate existing employees to higher levels of performance. There are nuances to which incentive plans will work for your organization, and when to use them.  

The following are primary incentive program examples, and their particular use cases: 

sales incentive program offers commissions and bonuses for companies looking to motivate top performers in a level of attainable competition, typically tracked internally with a software solution. 

A channel incentive program is used when companies are working with a variety of vendors or external partners to distribute their services or goods. These programs are designed to motivate these parties to align with a company’s overarching goals and improve business outcomes. 

An employee reward and recognition program provides ample opportunity to boost company morale and inspire interest and performance. Program aspects include acknowledging employee tenure or specific one-time achievements with both tangible rewards such as a bonus or gift as well as a public recognition to the rest of the company. According to SHRM, 80 percent of employers have an employee recognition program. Businesses without a program risk being losing the competition to retain talent. 

Incentive pay examples 

Incentive pay will depend on the varying payment plans an organization develops. It can also be distinguished into more specific types of payment, which is important to acknowledge for calculating segmented incentive payments.  

To get specific, incentive pay falls into both casual incentives and structured incentives, as well as monetary incentives and non-monetary incentives. Casual incentives lie on a smaller scale and are given out more sporadically, such as a non-monetary gift or company recognition. Structured incentives are set within an incentive plan, are well thought out, and involve a higher payout, such as a sales percentage after a finished project. 

The following are examples of monetary and non-monetary incentives: 

Monetary incentives: 

  • Equity  
  • Sign-on bonuses 
  • Quarterly or yearly bonuses 
  • Commissions 
  • Stock shares 
  • Debit card rewards (for rebates) 

Non-monetary incentives: 

  • Award or recognition  
  • Flexible work (i.e., “summer Fridays”) 
  • Special meals 
  • Travel rewards 
  • Gym memberships/wellness programs  

How to calculate incentive pay 

Employers will let employees know the details of an incentive payment or incentive program at the beginning of a payment period to inspire motivation and the employer. Therefore, numbers and percentages are decided ahead of time. Calculating incentive payments will depend on the programs employers decide upon. 

Calculating sales-based incentives 

To calculate a sales-based incentive payment, multiply the total sales profit times the percentage of commission.  

For example, Kiera is responsible for $80,000 in sales for this year. Her sales incentive is 10%, therefore her incentive payment would be $8,000. 

Calculating department goals  

Employers will often offer specific departments bonuses for solving a problem in a particular area of need—i.e., lowering expenses. To calculate the incentive payment, you would decide upon the total bonus amount, and divide it by the number of team members in the department.  

For example, if the marketing team of 7 people achieved their goal of bringing in an additional 50 sales qualified leads (SQLs) this year, and the total bonus payment allocated is $10,000, then each team member would receive $1,428 in incentive pay. 

Calculating non-monetary incentives 

Non-monetary incentives can be a great way of showing employees you appreciate them. Incentives like an extra day off, or a flexible work location, tend to carry a stronger emotional weight as well and establish autonomy and trust. These calculations are a matter of tracking expenses—such as an extra day off, or a special meal—in an ongoing accounting system and HR software.  

Establishing an incentive pay plan  

To create an incentive pay plan that works, employers should address the following questions internally:  

  • What are the company revenue goals? If you’re on a hard and fast timeline, employers may instead opt for a competitive base pay versus an incentive plan 
  • What are you aiming to improve for employees, and why? Are your incentives a direct result of company surveys, word of mouth, or intake forms? Is it competitive? 
  • How will the nuances in your workforce affect your plan? What is your generational demographic, and what are they looking for in a work setting? For example, your incentive plan for software developers will look different from your sales team  
  • At what stage is the company currently? How will the incentive plan scale with your organization? 

 While employer programs will differ across industries and sectors, one thing is certain:  incentive programs are a must consideration for any team looking to see its strongest potential.