What is Incentive Compensation, afterall?

This minutes read

Incentive Compensation is basically performance-based compensation – exclusive of the base salary that a rep might receive –  and is directly connected to the reps’ goals and milestones. A good Incentive Compensation plan will tell the rep in clear terms what they need to do in order to earn more. By setting clear and realistic goals for sales reps, an IC plan drives them towards profitability. 

If you are still wondering whether laying out your company’s goals clearly and communicating them with your sales team makes a difference, then this study from Mckinsey is for you: When a company challenged one of their teams with a clear goal  to achieve a $40 million target in 40 days, the team not only hit the mark, but crossed the mark several days in advance. 

Success stories like these are the reason why incentives are becoming an increasingly popular way to motivate salespeople and keep them on track. 

Good News- Your sales team is successfully hitting targets! Now how do you hand over the Incentive envelope? What kind of incentive would push your reps to perform even better? 

These four types of incentives are probably your best bet- 

  1. Commissions- The first card from the deck! Commissions are the most common when it comes to handing out incentives. 

It is very important to understand what exactly a sales ‘commission’ means. To put it simply, a sales commission is a monetary incentive that is given to a salesperson when they hit their targets. The aim is quite clear- growing your revenue by incentivizing your salespeople to earn more. 

Your sales commissions structure is more important than you think. It is instrumental in- 

  • Motivating your sales team to do their best and keep employee morale high
  • Attracting and retaining the best in the industry

Keeping this in mind, let’s look at the 9 best sales commision structures that organizations today swear by- 

  1. Base rate only commission
  2. Base salary plus commission
  3. Draw against a commission 
  4. Gross margin commission 
  5. Revenue commission
  6. Straight commission
  7. Tiered commission 
  8. Territory volume commission


Some commissions like Straight Commissions are quite easy to understand and manage- A sales rep is paid a pre-decided percentage of the revenue generated from every deal that they close. While others like Residual Commissions- a sales rep keeps on getting a percentage of the revenue generated as long as the client is associated with the company- are more complex and need a multitude of resources in order to be managed properly.

  1. SPIFs (Sales Performance Incentive Funds)- SPIFs are like a trick down the sleeve that companies can use to see results immediately. They are basically short-term incentives that can be used when a company wants to increase sales volume for a short period. They are also highly effective when a company is introducing a new product. Imagine a company launching a new product. They may give their sales reps a certain amount after each sale or after they reach a set target. This way attention can be directed to that product in the short term.
  2. Bonuses- Bonus payments have survived the test of time. They are essentially fixed amounts paid to reps when they reach specified targets. They can be paid on a monthly, quarterly, bi-annual and annual basis depending on the organization’s goals. Some companies also give bonuses to entire departments in order to achieve broader goals. 
  3. MBOs (Management by Objectives)- This system of incentives is aimed at making reps a part of the decision making process. The idea is to get the managers and employees to collaborate and set collective goals. The managers work on streamlining each individual's KPIs and make sure that larger  company goals are met by ensuring that each rep performs at an optimal level. 

Read this article to learn more about MBOs- https://www.kennect.io/post/understanding-management-by-objectives-mbo

Expected outcomes are clearly stated. Some examples could be- 

  • Cut costs 
  • Increase sales
  • Work for customer acquisition 

To learn more about how an automated Incentive Compensation Management solution can help you manage different types of incentives, book a demo with us today!

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