What is Incentive Compensation, afterall?

November 24, 2022
Diya Mathur
Diya Mathur
Diya Mathur
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Table Of Contents

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 while also ensuring fair and equitable broad based compensation structure across the team.

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- 

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, contributing to their OTE compensation. 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.

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 or rolling out new sales battlecards. 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, drawing attention to that product in the short term.

Bonuses

Bonus payments have survived the test of time. They are essentially fixed amounts paid to reps when they reach specified targets, a process made more transparent and motivating through the use of visual tools like sales deck templates. These templates can provide a clear roadmap, enhancing the understanding and pursuit of individual and departmental goals.

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- 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!

Author

Diya Mathur

Diya is a Product Marketing Associate and content writer specializing in Incentive Compensation Automation. Diya has honed her ability to bridge the gap between intricate software functionalities and accessible, reader-friendly content. Her articles are a testament to her dedication to breaking down intricate SaaS solutions into digestible insights that cater to both tech-savvy professionals and those new to the software landscape.