As a business owner, you want to incentivize your employees to do their best work. There are a variety of ways to inspire the best work from your team; for example, you can offer opportunities for growth within your company or invest in learning and development opportunities to help them gain new skills.
But sometimes, the best way to incentivize a higher level of employee performance? Through financial incentives.
Incentive pay can be an effective way to motivate your team and drive results. But it can also present its fair share of challenges—and, depending on your team and business model, it may not be the best pay structure for your business.
But what, exactly, is incentive pay? How does it work? And how do you determine whether an incentive program is the right fit for your team and organization?
What Is Incentive Pay?
First things first—before we jump into the different types of incentive pay plans, how they work, and how to determine whether they’re the right move for your business, let’s quickly touch on what, exactly, this type of pay is.
In addition to an employee’s base salary or hourly wage, an incentive plan offers additional rewards (either in the form of additional pay or non-monetary incentives) based on a set of predetermined metrics (for example, hitting a quarterly sales quota or shipping a certain number of items in an eight-hour shift).
The idea behind incentive pay plans is that the added incentive will push employees to work harder to hit the goal and get the reward—and when your employees work harder, they drive better results for your business.
What Are The Different Types Of Incentive Pay Plans?
So, the definition of incentive pay is offering added incentives to your team to inspire better performance. But not all incentive pay plans are alike, and before you decide to roll out an incentive plan at your business, it’s important to understand the different types of plans—and which would make the most sense for your business and your employees.
There are a few different types of incentive pay plans, including:
- Pay-For-Performance Incentives. One of the most common incentive pay structures is tying incentives directly to employee performance. So, for example, in addition to their base salary you might offer your salespeople 15% commission for every sale they close or $50 for every new account they bring into your business.
- Group Incentives. Some companies choose to tie incentives to group performance instead of individual performance. So, for example, if your team of salespeople hits their quarterly sales quota, everyone on the team gets a $5000 bonus—but if the team doesn’t hit their quota, no one gets a bonus (even if individual salespeople on the team performed at quota level).
- Retention Bonuses. If you want to incentivize your employees to stay with your company for the long term, you might consider offering retention bonuses, like additional stock options for every year an employee is with your organization.
- Non-Monetary Incentives. While many incentive plans revolve around additional pay, money isn’t the only way to incentivize your team. You could also offer other casual incentives to motivate your team, like an extra day of PTO, company swag, or a ticket to an industry event or conference.
What Are The Pros And Cons Of Incentive Pay?
Clearly, incentive pay structures offer a variety of ways to reward your employees for a job well done. But, like anything else, there are benefits and challenges to rolling out an incentive pay plan at your business.
So, what are some of the major pros and cons of incentive pay?
- It can drive high performance in your team. Some employees are naturally hard workers—but some will work harder when they know there’s something additional in it for them. Offering incentive pay (or non-monetary incentives) can boost productivity and give your team the motivation they need to go the extra mile and perform at a higher level.
- It can give your employees the opportunity to earn higher pay…Incentive pay gives your employees the opportunity to earn a higher wage and build more financial security—even if their base salary or hourly wage is on the lower end.
- ...with minimal risk on your end. From an employer perspective, one of the major benefits of an incentive pay structure is that you don’t provide additional pay unless your employees hit a specific target. So, instead of hiring a salesperson for $100K and hoping they perform as well as they say they will, you can hire them at $35K and offer them a generous commission structure; that way, if they bring in a high volume of sales, they’ll earn their $100K compensation—but if they don’t, you’re not on the hook to pay their $100K salary.
- It can inspire employees in the wrong way. Rewards can inspire some employees to work harder—but they can also inspire some employees to cut corners, lie, or cheat. For example, if you have an incentive pay structure that offers $50 for every new account, a less-than-honest employee might be inspired to create fake accounts in order to snag the reward.
- It can cause productivity and performance to tank for certain employees. While some employees thrive in a pay-for-performance environment, the pressure of incentive pay can have the opposite effect on other employees. If your team members don’t perform well under pressure, an incentive pay structure can actually cause their productivity, performance, and engagement to take a nosedive—and it may actually drive them to look for employment elsewhere (where they offer a more traditional pay structure).
- It doesn’t make sense for every role or job. There are certain roles that lend themselves to incentive pay—like sales or production roles. But other jobs lack the performance metrics necessary to build an incentive pay plan; for example, it doesn’t really make sense to offer performance-based incentives to accountants, administrative assistants, receptionists, or HR generalists.
Things To Keep In Mind When Developing And Implementing An Incentive Pay Plan
Clearly, there are pros and cons of implementing incentive pay at your business. But if you do decide that an incentive-based pay structure is the right fit for your business, there are a few things you’ll want to keep in mind to make sure the roll out is a successful one:
- Strike the right balance. In order for a performance-based incentive pay plan to benefit both your business and your employees, it’s important to strike the right balance between incentive and performance. For example, if you’re going to offer your employees extra compensation based on their sales, the amount of compensation they receive per sale should be correlated to the amount of revenue that sale brings into your business. If you give your employees a $5 incentive for a $10,000 sale, that’s not going to motivate them to close the deal. On the flip side, if you offer a $900 incentive for a $1,000 sale, that should definitely light a fire in your employees—but you’re not going to be driving significant revenue for your business. Make sure that, when you develop your incentive pay structure, you’re incentivizing your employees enough that they’ll be motivated to perform at a higher level—but not so much that it hurts your bottom line.
- Figure out how you’re going to keep the entire group motivated. If you decide to go with an incentive pay plan that relies on group performance, it’s important to have a strategy from the get-go on how you’re going to motivate the entire group—and how you’re going to keep the group motivated if there’s someone on the team that’s underperforming. For example, if your sales team’s bonus is based on the entire team hitting a quarterly goal, your top salespeople could become unmotivated or frustrated if they feel like other team members aren’t performing up to par—and, as a result, your incentive pay plan could actually cause sales to drop. Anticipating those challenges—and having a plan for them from day one—can help make your implementation more successful.
- Keep it simple. Overly complicated incentive pay plans can be hard to implement—and hard for your employees to wrap their heads around. If you’ve never offered incentive pay, keep things simple. Not only will it make it easier for you to develop on the back end and roll out to your team, but it will also be easier for your team to understand the pay structure—and what they have to do to qualify for incentive pay.
- Ask for feedback. If you’re implementing incentive pay for the first time, there’s bound to be some challenges, setbacks, and bumps in the road. And that’s ok—as long as you learn from them and continue to improve. When you’re rolling out an incentive pay plan, ask your team for feedback. Are the incentives motivating? What do they like about the pay structure? What do they think could be better? Getting direct feedback from your employees can help you continually adjust your plan to make sure it’s fulfilling its purpose—incentivizing your team.
Bottom Line: Is Incentive Pay The Right Fit For Your Business?
When it comes to answering the question “is incentive pay the right fit for my business?,” there’s no one-size-fits-all answer. Incentive pay can be a huge win for certain businesses, driving productivity and performance—while that same pay structure can majorly hinder productivity and performance at another company.
Ultimately, only you can decide whether an incentive pay plan is the right fit for your organization. But if you’re thinking about offering incentive pay to your employees, it’s important to understand the different types of incentive pay, the pros and cons of each type, and how those pros and cons play out in your business—and use that information to make the best decision for your employees and your organization.