A Comprehensive Guide to Types of Variable Incentives

September 8, 2023
Sheetal S Kumar
Sheetal S Kumar
Sheetal S Kumar
Decorative image: Aesthetic background with abstract shapes and colors.

How important is employee recognition?

The simple answer is it is the most important part of any organization's management.

In any workspace, employees wish to be appreciated for the work they do. This helps to improve their confidence, drive them to perform better, and create a sense of belonging that can define a work culture.

Among a lot of powerful tools and techniques out there, incentive compensation is an effective way to recognize your employees. 

In this article, we will explore incentive pay, its benefits, the various types of compensation, and the step-by-step process of building an effective compensation program.

For more reading, scroll down. 

What is incentive compensation?

Incentive pay is the reward a salesperson receives for the business they have brought to the organization. 

Incentives are usually provided in the form of monetary rewards and are paid along with their base salary on a quarterly or annual basis. 

Depending upon the organization and their incentive policy the percentage of sales, duration of payment and other particulars will be determined. 

The benefits of incentive compensation

Incentive compensation is an integral part of ensuring sales motivation and performance. It is a widely used tool for the following reasons:

Benefits of Incentive Compensation
  • The primary purpose and benefit of incentive compensation is to ensure employee motivation. A motivated salesforce will be focused on achieving their sales quotas and objectives timely. 
  • Sales commissions help boost sales performance. Only a high-achieving sales team can drive sales and lead the company to growth. 
  • Incentives are a way of appreciating your employee's efforts. Recognizing and rewarding your employees for their achievements will ensure that they maintain their performance and work harder to improve. 
  • Salesforce is eligible for compensation only when they achieve their sales quotas. An effective incentive program will push employees to achieve their quotas, be eligible for compensation, and thereby play a crucial part in fulfilling the company's objectives.  
  • Organizations first draw their company objectives and then assign each employee their targets. This ensures that all individualistic achievements holistically contribute to fulfilling the larger company objectives. 
  • Incentives are an important tool to ensure employee validation and satisfaction. When employees feel rewarded in their workspace it will help improve their engagement and reduce turnover. 

Organizations must invest time and effort in building an effective incentive compensation program to reap the benefits it offers, including considerations for a non-recoverable draw

To read more about the benefits of incentive programs, check Maximizing Productivity: Benefits of Employee Incentive Programs

Types of Variable Incentive Compensation

Organizations recognize their employees' efforts in various ways. However, incentives are always some materialistic or monetary rewards that are of use to the employees. Recognizing and rewarding employees' performance aligns with the objectives of sales management, fostering motivation, productivity, and a positive work environment conducive to achieving sales targets.

Here are a few incentive pay examples to incorporate in your sales management.

Types of Variable Incentive Compensation
  • Sales commissions

Individual incentives, such as bonuses tied to achieving specific sales targets or performance metrics, can further motivate sales reps in addition to their regular commission structure, encouraging consistent high-performance throughout the year.

  • Management by objective bonuses

Management by objectives is an incentive approach where sales reps receive their reward when they have completed the set of tasks or duties assigned by their manager. This ensures that the salesforce accomplishes the set tasks, achieves the expected performance, and thereby earns their incentive. 

  • Profit-sharing

Organizations can calculate incentives in various ways for their salesforce, leveraging the sales funnel and sales pipeline data to ensure that commissions and profit sharing align with each stage of the customer journey.

  • Vacation Offers

Monetary rewards are a good motivational tool for salesforce as it is useful and can be utilized according to one requirement. White non-monetary rewards have a much more impact on the employee. For example, offering a vacation or time off from work as incentives helps salesforce take a step away from their usual routine, rejuvenate, and come back with better ideas and performance to drive sales. 

Whatever types of incentive pay a company chooses to offer its employees, the crux is that such validations, recognitions, and appreciations are important for an employee to maintain or improve their performance and stay committed to their work.

For further reading on effective incentive examples check 10 Effective Incentives to Boost Employee Motivation and Productivity

How to design a great incentive compensation plan

Organizations can gain the benefit of incentive compensation plans only when they build a program that caters to their requirements. 

Here is a step-by-step process for building an effective incentive compensation plan for your organization. 

How to Design a Great Incentive Compensation Plan
  • Understand the company structure  

Additionally, when considering incentive approaches, it's essential to evaluate factors like company size and employee distribution, as well as whether a non-recoverable draw system might be a suitable option for supporting salesforce stability during ramp-up periods.

  • Determine your business goals 

Analyze why you are incorporating an incentive program in your operations, what results you plan to achieve through this initiative, and set the goals and objectives you wish to fulfill by employing this tool in your business operations.

  • Decide the key performance metrics

Organizations provide incentives to employees when they have met a set of criteria prescribed for eligibility for compensation, including the MBO commission. Designing key performance metrics thus helps in bringing structure and system to your incentive program. This also ensures that there is clarity between the employee and the management of what is put under the test to be rewarded.

  • Allocate budget for an incentive program 

In most cases, incentives are monetary rewards that the company provides its employees for their achievements, often structured within the framework of OTE salary meaning. Hence, a separate budget must be allocated to meet this cost. Estimating a budget also helps organizations streamline operations while setting the sales quotas to company objectives.. 

  • Evaluate its implementation outcomes

The effectiveness of any tool or technique is determined by its outcome. Hence organizations must evaluate whether the incentive program is yielding the intended result it was designed for. 

  • Update the program regularly 

Regular evaluation of the incentive program will bring to notice the areas of improvement. Getting employee feedback on its effectiveness and consistently reworking it will help organizations build a program that best suits their operations, meet their requirements, and bring in the intended positive impact. 

A perfect incentive compensation program can be built only through constant reconstruction. Organizations must put in the effort to ensure that their incentive compensation program is efficient and effective.  

Conclusion

Incentive compensation is an effective and inevitable tool in the current sales landscape. 

The various incentive models and forms help organizations to build plans that best suit their structure. But in the current digital era, incentive compensation has also upgraded to adapt to automation.

Automation of incentive compensation management helps organizations optimize their operations and achieve growth potential.

Kennect runs your sales compensation programs in cruise mode to create transparency and achieve operational efficiency. For more information Book A Demo Now!

Author

Sheetal S Kumar

Sheetal is a content strategist and writer at Kennect. She has extensive writing experience in content marketing and research, focused on small business enterprises and B2B Saas. She is passionate about creating engaging and insightful blogs while exploring the power of content and social media.

Comments

What do u think
of this article ?
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Kennect Insider: Stay ahead of the curve!
Subscribe to our newsletter packed with latest trends and insights on incentives.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Your data is in safe hands. Check out our Privacy policy for more info