What is incentive compensation?

incentive compensation

Learning how to motivate your sales team is one of the most important things you can learn as a leader. Some employees respond to gentle encouragement, while others need more direct feedback to get revved up. But there’s one type of motivation that’s almost universally effective: money. That’s where incentive compensation shines.

Learn all about incentive compensation and how this fluid approach to payday could inspire your team to work harder and scale quickly.

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What is incentive compensation?

Many non-sales jobs come with a fixed income, meaning you get paid the same amount every paycheck no matter what. That’s ideal for anyone who thrives on stability, but that guaranteed biweekly deposit doesn’t do much to encourage an extra dose of hustle.

Incentive compensation is a type of variable compensation that awards earnings depending on how the team member performed. In other words, the more someone sells, the more money they get to take home.

Incentive compensation is commonly structured as base pay plus commission to help keep salespeople afloat in between deals. It’s also not unusual to see non-monetary incentives on offer. Prizes, free vacations, stock options and at-work perks can also inspire.

Who gets incentive compensation?

Incentive compensation is an option for anyone who has a quota. That includes SDRs, account managers, account executives, some customer success roles, etc.

For incentive compensation to work, candidates must fit two criteria:

  • They must be given a number to hit so it’s possible to gauge performance in a quantifiable, objective way.
  • They must have opportunities to sell and a chance to showcase their unique brand of hustle.

Incentive compensation can be a valuable tool both during recruitment and after your hires are hard at work. Do your part to create an effective system by being totally transparent. Every employee should know what types of compensation are on the table and how they can exponentially higher earnings.

Why hand out incentive compensation?

Being a salesperson is wonderfully liberating because you finally have at least some authority over your income. What you do informs how much you make. In other words, a career in sales means that the better you do, the more you get paid. That’s an attractive upside for job seekers interested in moving away from set salaries and pursuing professional growth.

For employers, handing out incentive compensation is like issuing a challenge to their entire team. It’s like you’re saying “Meet this objective and you win a big prize.”

Tips for creating an Incentive Compensation plan

1. Outline clear, realistic objectives

Give your employees goals to hit. These personal objectives should align with larger business objectives. They should also be attainable to keep employees motivated and generating revenue.

2. Emphasize the importance of organizational results

It’s great for salespeople to feel motivated by their own desire for success, but what the company needs matters too. Sales incentive programs can drive competitiveness, sometimes to the extreme. By splitting focus between individual quotas and organizational goals, you empower the entire team without capping individual results.

3. Create a pay structure

The obvious play is to compensate salespeople for hitting an overall goal, such as a quarterly sales quota. But there are other ways to structure financial incentives.

A SPIF, or sales performance incentive fund, encourages reps to push a particular item or portfolio. SPIFs are often used to promote a new feature launch or boost sales of a product line. The opportunity for immediate results is tempting, but there are downsides to offering a SPIF (also called a SPIFF or SPIV) too.

Some insiders believe that SPIFs encourage salespeople to push for sales at all costs when they should be giving clients what they need. Instead, they’re tempted to compel the buyer to go with the option that results in the best commission or bonus. The trick is to use short-term incentives programs such as SPIFs as a complement to a more long-term sales incentive program. One is exciting due to the speedy return. The other helps develop salesperson-client relationships and drive continued success.

Single-rate and multiple-rate bonuses as well as milestone bonuses are also worth exploring. If you need a hand creating your compensation plan, I’m here to help!

4. Communicate expectations

Nobody can hit a target unless they know where and what it is. Outline your compensation program, and make sure everyone has a copy. Transparency is key, as is a plan that accounts for every position and reasonable circumstance.

Additionally, ensure your employees all have solid employee development plans in place. That way there is no ambiguity on how to progress and be promoted.

5. Incorporate supporting sales roles

It’s not just your salespeople making the magic happen. Customer service agents, lead qualifiers, techs, administrative support — they all deserve to have their contributions acknowledged, too. Include them in your sales compensation plan, even if the rewards aren’t as big and flashy.

6. Think beyond money

Surprise! Not all salespeople are motivated most by money. Financial rewards are wonderful, but there are other options worth exploring. Incentive programs can include:

  • Gift cards
  • Tickets to a show or sporting event
  • An invitation to a corporate retreat
  • Special merchandise
  • Travel rewards
  • About a hundred other things

Research what your team would want and make that the pot of gold at the end of the sales rainbow.

7. Budget for bonuses

Leave room in your budget to go above and beyond if team performance warrants it. Say you’ve decided to give out one big prize to the top seller. Then the entire term delivers way past expectations. Sure, they’re getting their normal commission. But wouldn’t it be nice to come up with a second and third prize last minute?

It’s entirely possible to plan secretly for tiered prizes for runners-up without announcing it first. In fact, the surprise factor could be an additional motivator the next time you’re running a sales contest.

8. Be prepared to pivot

When COVID-19 hit, business were forced to revisit their compensation plans. The goal was to help reps cope with the new normal and adapt to economic stress. Lowering quotas and removing decelerators and commission cliffs can prevent demotivation. You can also add in new more feasible incentives and reward other performance factors aside from total revenue. These measures may be temporary, but the goodwill and morale boost lasts a long time.

Tracking incentive compensation

The more salespeople you have, the harder it is to keep an eye on everyone’s numbers. Figuring out who is meeting or exceeding quotas can feel like trying to juggle a dozen balls coated in something desperately slippery. Luckily, QuotaPath can help. Our proprietary sales commission software can help your team understand earnings, track incentive compensation and so much more.

Interested in having more flexibility and control? Sign up for free today and see why people love QuotaPath.

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