Incentive Pay

What is Incentive Pay?

Incentive pay is a remuneration model where the employees are financially recognized for their superior performance, productivity, or target attainment through their specific goals or performance. On the contrary, while base salary remains constant, incentive pay can vary depending on the particular performance metrics established for the individual or the team. These performance indicators might comprise of sales objectives, production goals, customer satisfaction ratings or general company's profitability. Incentive compensation corresponds to a number of options like bonuses, commissions, profit-sharing plans, stock options or performance-based rewards. The incentive pay system seeks to boost employee performance by tying compensation to specific performance outcomes thereby driving the workers to put in extra effort, accomplish goals and pave way for organizational success. It is a unifying tool, where the interest of the personnel is in line with that of the organization, the performance of the employees is enhanced and meritocracy and accountability are developed as a workplace culture. Well-designed incentive pay plans are made to be fair, understandable, and meaningful in catayzing the desired behavior is responses. They do this without creating any unintended consequences.

Example

In a sales organization, commission-based pay is one widespread form of incentive pay. For instance, suppose a software company where the sales people earn a base salary with an incentive commission as they make a sale. The commission may be paid in the form of the commission structure which offers a percentage of the total sale value in addition to the base compensation. This makes sales representatives proactive, actively pursuing leads. They negotiate and close sales quickly, as their earnings are tied to their sales results. Take a sales rep, for instance, who outperforms the monthly sales quota and gets a higher commission rate for each sale which is a sure way of appreciating them for their exemplary performance. The company provides its sales team with commission structures that can inspire them to achieve a number of targets such as revenue growth, client satisfaction, and success of the company as a whole. This illustrates how incentive pay can have an integration between individual performance and organizational objectives for employees, and also the organization itself.