Getting incentive compensation right is crucial for boosting sales productivity, retaining top performers, and powering growth. However, the one-size-fits all plans of the past struggle to engage today's workforce.
Outdated "carrot and stick" models are giving way to multifaceted compensation strategies that integrate financial rewards with intrinsic and social motivators. Meanwhile, the latest technologies now let finance leaders continuously optimize incentives based on data and insights.
This blog shares the top 8 most effective incentive compensation strategies for sales and finance teams to build into their pay plans in 2024. These techniques strike a balance between rewarding individual accomplishments and furthering organization-wide goals.
8 Types of Incentive Compensation Strategies to use in 2024
Thoughtfully designed incentives can align sales teams to financial aims, customer needs, and corporate values simultaneously. By incentivizing the right behaviors, CFOs can positively influence culture, motivate people, and drive sustainable success.
Here are 8 different types of incentive compensation strategies to use in 2024:
1. Gainsharing Plan
Gainsharing plans are financial incentives offered to employees based on improvements in their individual performance that lead to overall business gains. These are often paid monthly and can be targeted to specific business goals like increased revenues or lower churn rates.
For example: A SaaS company instituted a gainsharing program to improve customer retention. Their employees earn monthly bonuses based on the company's churn rate declining. If overall churn drops from 5% to 4%, the bonus pool would be distributed based on individual contributions towards improving renewals.
Financial incentives tied directly to specific performance indicators like churn can help focus employees' efforts. And because gainsharing rewards are paid frequently (often monthly), they enable managers to monitor progress and adjust programs accordingly.
Pro Tips for Gainsharing Plans:
1. Structure measurable goals based on company objectives like revenue growth, customer satisfaction, cycle times etc.
2. Pay rewards frequently enough to track progress and make adjustments
3. Make payout significant enough to motivate, but maintain sound finances
4. Communicate effectively to employees on how bonuses are calculated
2. Profit-Sharing Incentives
Under profit-sharing incentives, employees receive bonus payments based on the company's overall profitability, usually paid annually. The total bonus amount is divided among recipients based on a formula.
For example: A SaaS company that pays out 5% of its $2M in net profits as an annual bonus to employees. The $100,000 total could be allocated based 50% on seniority and 50% distributed evenly amongst staff.
Tying employee earnings to the company's profitability promotes a "we're all in this together" culture and drives cross-department collaboration.
Pro Tips for Profit-Sharing Plans:
1. Allocate based on measurable factors like tenure, salary, or job level
2. Combine individual and company performance factors in formula
3. Communicate clearly on calculations and payout timing
4. Balance rewarding high performers with less experienced staff
3. Spot Awards
Spot awards are small financial or non-monetary rewards given to recognize exceptional short-term individual performance. Value is typically 0.25-1% of total payroll. Some examples of these forms of incentives are gift cards, trophies, meals, etc.
For example: A SaaS company that gives spot bonuses in the form of gift cards or extra PTO to reps who go above and beyond on calls or deliver an impressive sales presentation.
Spot awards incentivize standout contributions that may be difficult to quantify but deserve recognition. Because they are paid quickly soon after the achievement, they reinforce the desired behavior.
Pro Tips for Spot Awards:
1. Establish criteria for nominating and selecting award recipients
2. Match award type to employee preferences (public recognition, gift cards, etc)
3. Keep budget modest but set pool high enough to maintain incentive
4. Consider linking pool amount to metrics like revenue thresholds
4. Annual Incentives
Annual incentives are one-time lump sum payments made on top of normal compensation based on annual individual or company performance. These can be a fixed percentage of base salary or tiered based on performance levels.
For example: A SaaS company that pays annual bonuses ranging from 5-15% to employees based on exceeding predetermined sales targets and revenue growth benchmarks.
Annual incentive payouts enable companies to reward achievement of longer-term goals. Establishing tiers and capping maximum earnings allows firms to maintain sound finances.
Pro Tips for Annual Incentives:
1. Clearly outline performance metrics and ranges for bonus tiers
2. Set maximum caps on payouts tied to stretch goals
3. Balance individual objectives with company-wide success factors
4. Consider phasing parts of bonuses over multi-year periods
5. Sales Performance Incentive Fund (SPIFFs)
SPIFFs are short term rewards to generate immediate sales results, often targeted to a specific goal like launching a new product. The downside to SPIFFs is their potential to encourage aggressive sales tactics.
For example: A SaaS company that offers a $10,000 cash SPIFF if the sales team hits a goal of 400 new software subscriptions in Q4 to meet its 1,500 subscription target for the year.
SPIFFs provide large payout potential for achieving urgent revenue milestones. However, they risk over-focusing on short-term results vs long-term customer success.
Pro Tips for Sales SPIFs:
1. Outline SPIF rules and timing clearly upfront
2. Limit frequency to avoid conflict with ongoing compensation
3. Ensure SPIF goals align with company values and ethics
4. Balance with compensation driving sustainable growth
🔔 For more on SPIFFs, see our elaborate guide "What is SPIFF in sales: A Comprehensive Guide for 2024"
5. Referral Bonuses
Under Referral Bonuses, employees receive a bonus when they refer a new customer or employee who gets hired. This leverages employee networks to reduce acquisition costs.
For example: A SaaS company provides a $1,000 bonus to sales reps who refer a new customer that closes a deal over $5,000 in value. A $500 bonus is paid if the referral gets hired.
Referral bonuses incentivize leveraging employee connections and networks to grow sales and recruit talent. This can lower acquisition costs for high quality leads and candidates.
Pro Tips for Referral Bonuses:
1. Outline program terms clearly defining eligibility
2. Set minimum deal or tenure requirements for payout
3. Market internally to maximize awareness of program
4. Consider tiers based on deal size or role seniority
6. Team Bonuses
Team bonuses are financial rewards directed at entire teams, departments, business units or divisions for collaborative achievements. These incentives promote cooperation between individuals in the team.
For example: A SaaS company that provides an additional 10% quarterly bonus to business units that meet defined customer satisfaction or renewal rate targets.
Team bonuses build esprit de corps and shared purpose between individuals. They motivate employees to prioritize department-wide key performance indicators (KPIs).
Pro Tips for Team Bonuses:
1. Outline clear metrics and goals for earning team payouts
2. Complement with individual rewards to maintain accountability
3. Spotlight collaborative achievements company-wide
4. Keep consistent across quarters and business cycles
🔔 Learn best practices for optimizing SaaS sales compensation in our guide "Optimizing SaaS Sales Compensation: A CFO's Guide"
What are the Characteristics of an Effective Incentive Compensation Plan?
While the incentive compensation strategies may vary, the most successful plans that motivate employees and align behaviors with business goals share several key characteristics:
- Measurable - Incentives must be tied to clear, quantifiable metrics like revenue, profitability, customer satisfaction scores, etc. that employees can directly influence.
- Achievable - Goals underlying incentives should stretch people but still be reasonably obtainable to keep engagement high.
- Aligned - Incentivized KPIs should relate clearly to overall corporate objectives so that rewarding performance on those fronts will further strategic aims.
- Significant - Plan payouts should form a large enough component of target income to serve as a meaningful motivator and reward.
- Transparent - Clear communication on how incentives are calculated and the link between performance and payouts is vital for acceptance.
- Balanced Short and Long Term - The plan should incorporate both shorter-term incentives to drive immediate actions balanced with longer-term components to encourage sustainable results.
Ensuring incentive plans reflect these characteristics will maximize the motivational value and performance impact of compensation strategies.
The key is then continuously refining programs based on data and insights to optimize alignment with ever-evolving business needs.
Designing an Effective Incentive Compensation Plan
Beyond selecting the right mix of incentive compensation strategies, organizations should follow key principles to optimize their plans:
Align Plans to Company Goals
Incentive programs must connect to overall corporate objectives and growth priorities. Otherwise reps chase metrics that diverge from business success. Outline targets driving strategic aims. For example, tie sales incentives to customer retention or account expansion goals rather than pure new business volume.
Use Targeted SPIFFs
Minimize distraction of broad SPIFFs by tightly defining duration, products, services, and customer profiles eligible for short-term incentives. Ensure SPIF objectives align with annual targets. Tailor SPIF eligibility to avoid conflict with ongoing core compensation.
Structure Accelerators & Decelerators
Stair-step bonus multipliers through tiers for substantially overperforming quota. Mitigate excessive payout risks with threshold-based decelerators reducing commissions below goals. Balance risk by capping maximum payouts at rational levels despite unlimited accelerators.
Offer Non-Cash Awards
Counterbalance heavy transactional earnings with morale-building recognition through spot bonuses (gift cards, events, public praise). Allows for diverse motivators beyond cash, satisfying employee preference diversity. Spot awards also enable social reinforcement and encouragement of team behaviors.
🔔 Learn how to minimize the invisible costs of sales commissions in our blog "The Invisible Costs - Sales Commission Overpayments & Clawbacks"
Managing and Optimizing an Incentive Compensation Program
Successfully managing an incentive compensation plan requires active governance and continuously optimizing based on insights. Key activities include:
- Conduct Annual Evaluations - Formally evaluate incentive plan efficiency, effectiveness, and alignment to goals annually. Assess achievement of targets, intended and unintended impacts on behavior, and ROI.
- Monitor Ongoing Performance - Maintain compensation dashboards highlighting key performance trends across plans. Watch for anomalies or areas diverging from forecasts that may require intervention.
- Simulate Plan Changes - Model impacts of potential plan updates across various performance scenarios and cycles. Understand nonlinear effects on earnings and budgets before deploying changes.
- Clean Data Quality Issues - Inconsistent and inaccurate reporting undermines incentive plan credibility. Proactively detect and resolve reporting gaps, errors, missing history causing rep disputes.
- Formalize Compliance Policies - Codify required behaviors, ethical guidelines, clawback policies for unethical, non-compliant selling required for continued incentive eligibility.
🔔 Learn how to optimize reporting for sales commissions under ASC 606 in our article "A Practical Guide to ASC 606 Sales Commissions (+ Sample Reports)”
How does Incentive Compensation Management Software help?
Sales compensation software like Visdum centrally administer incentive calculations, reporting, modeling scenarios, and plan management to increase program speed, accuracy and visibility. Major capabilities delivered include:
- Automated Payout Calculation - Platform accurately calculates complex commission, bonus, and incentive earnings leveraging source data integrations eliminating manual errors.
- Compensation Data Warehouse - Centralize compensation plan definitions, payout history, adjustments, bonuses, and all related details in a structured database accessible across stakeholders.
- Modeling and Forecasting - Instantly model changes across plans measuring impacts to earnings by team, role, or individual across chosen performance timeframes.
- Governance Workflows - Embedded exception request, review, and approval flows between administrators, managers, and reps enable monitoring and issue documentation.
Talk to a sales compensation expert today.
Conclusion
Incentive compensation delivers a proven means to motivate human performance. But thoughtfully balancing short and long-term strategies tailored to each sales role is fundamental to driving sustainable growth.
Complimenting financial incentives with regular recognition addressing intrinsic needs also allows for diverse motivational inputs.
While designing the optimal incentive compensation portfolio requires judgment, insights from compensation software enable continuously refining programs towards ever-greater organizational achievement.
Ultimately by strategically inspiring both individual excellence and collective mission, companies can enable human potential and mutually beneficial success.
FAQs
What is meant by incentive compensation?
Incentive compensation refers to variable pay that is linked to employee or company performance. It is designed to motivate and reward employees for achieving specific goals or metrics. Common forms include commissions, bonuses, profit sharing, and performance units.
What is incentive compensation in CTC?
CTC stands for cost-to-company. Incentive compensation in CTC refers to performance-based pay that is included in an employee's total CTC or overall salary package. It is over and above the employee's fixed pay and tied to their ability to meet predefined targets.
Is incentive and salary the same?
No, incentive and salary are not the same. Salary refers to the fixed component of pay that an employee receives, usually expressed in an annual amount. Incentives are variable components over and above salary that change based on individual or company performance factors.
Is incentive compensation a bonus?
Yes, generally incentive compensation refers to bonus payments made for meeting performance metrics. Bonuses are a form of extra compensation used to reward employee contributions above their regular job duties or expected performance levels. Other types of incentives include sales commissions, profit sharing, and equity programs.
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