.svg)
Glossary Terms
Compass - The Only Sales Glossary You Need
Incentive compensation, often referred to as incentive pay, is a method of remuneration that offers employees additional rewards beyond their base salary or hourly wages. This form of compensation is designed to motivate and recognize exceptional performance.
Incentive compensation, also known as incentive pay, refers to a form of remuneration provided by employers to motivate and reward employees for achieving specific goals or exceptional performance.
Incentive compensation is separate from an employee's regular salary or hourly wages. It can take various forms, including bonuses, stock options, commissions, profit-sharing, and other performance-based incentives.
An example of incentive compensation is a sales commission plan. In this type of incentive program, sales representatives receive a percentage of the revenue generated from their sales efforts.
For instance, if a sales representative is on a 5% commission plan and they close a deal worth $10,000, they would earn a $500 commission (5% of $10,000). This provides a direct financial incentive for sales reps to actively pursue and close deals, as their earnings are directly tied to their sales performance. Therefore, sales commission plans are a common form of incentive compensation used to motivate and reward sales teams.
Incentive based compensation is a performance-driven pay structure where employees earn additional rewards for meeting specific goals. It aligns compensation and incentives with business objectives to motivate high performance and results.
An incentive compensation plan outlines the framework and criteria for rewarding employees based on their performance, achievements or attaining certain targets. These plans can include various incentives, such as bonuses, commissions, profit-sharing, and stock options, to motivate employees and align their efforts with organizational goals.
Long-term incentive compensation refers to employee rewards or bonuses based on their sustained performance and contributions to the organization over an extended period, typically spanning multiple years. Long-term incentives include stock options, restricted stock units, and performance shares.
Short term incentive compensation refers to bonuses or rewards given within a year based on achieving immediate targets such as sales quotas, KPIs, or project milestones. It is commonly used to drive quick results and improve employee focus.
The key difference between a long-term incentive and a short-term incentive lies in the time frame and goals they are designed to support:
In sales, short-term incentives drive quick wins, while long-term incentives encourage sustained performance and loyalty.
Target incentive compensation is the expected bonus amount an employee can earn by fully meeting set performance goals. It helps sales teams understand the link between their performance and their total compensation and incentives.
In a Compensation and Total Compensation (CTC) structure, incentive compensation refers to the portion of an employee's overall compensation package that is variable and dependent on their performance or the achievement of specific goals. This can include bonuses, commissions, profit-sharing, or other forms of performance-based pay.
Some common types of incentive compensation include,
The best incentive compensation plans are goal-oriented, transparent, fair, measurable, and aligned with company strategy. They motivate performance, are easy to track, and adapt to changing business needs while reinforcing employee engagement.
The benefits of incentive compensation are:
