Incentive Compensation
What is incentive compensation?
Incentive compensation is any pay tied to performance rather than to time worked. If someone is paid for showing up, that is salary. If they are paid for achieving something, that is incentive compensation.
Sales commission is the most familiar form, which is why the two terms get used interchangeably. They are not the same. Commission is one type of incentive compensation, specific to revenue-generating roles and usually calculated as a percentage of deal value. Incentive compensation is the whole category, and it reaches across the business.
All incentive compensation is variable pay. But not all variable pay is commission, and treating those words as synonyms is what leads a company to design a commission plan for a role that should never have had one.
The main types
TypeTied toTypical holderCommissionRevenue from closed deals, usually as a percentage.AEs, full-cycle repsBonusA defined achievement, often discretionary or lump sum.AnyoneAnnual incentive planCompany and individual performance across a year.Finance, HR, leadershipMBODefined objectives, often qualitative or non-revenue.CSMs, SDRs, some AEsSPIFFA short-term push on a specific product or behavior.Sales teams, time-limitedProfit sharingCompany profitability.Broad employee baseEquityLong-term company value.Leadership, and often everyone
The design question that matters is which of these fits the role. A MBO suits a CSM whose contribution to revenue is real but indirect. Commission suits an AE who closes. Giving the CSM a commission plan will either pay them for something they do not control, or pay them nothing for the thing they do.
What this means?
For Finance, incentive compensation is the part of payroll that moves. Salary is predictable and can be budgeted a year out. Incentive compensation depends on performance, which means it has to be accrued, forecast, and trued up, and it is the reason commission accrual exists as a discipline at all.
For HR and RevOps, the useful discipline is to stop calling everything commission. A company that has one word for all performance pay ends up with one instrument for all performance problems, which is how sales-style plans get applied to roles that cannot influence revenue directly, and why those plans then fail in ways nobody can explain.
How Visdum handles incentive compensation
Most commission tools handle commission and treat everything else as an exception, paid off-plan by a manual adjustment that nobody tracks. That is how MBOs, SPIFFs, and bonuses end up invisible in the comp expense line.
Visdum models each of these as its own plan component rather than as an afterthought. A single plan can combine revenue commission for closers, MBOs for non-revenue objectives, SPIFFs for a time-bound push, and bonuses, all calculated, approved, and paid through the same process, and all visible on the same statement. For Finance, that means the whole of incentive compensation is a tracked, accruable expense rather than commission plus a pile of untracked exceptions.
Take a self-guided product tour to see this in action, or read how to build a SaaS sales compensation plan.
Related terms
Variable Compensation · Sales Commission · MBO · Bonus · ICM
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Frequently asked questions
What is incentive compensation?
Incentive compensation is any pay tied to performance rather than to time worked. Sales commission is the best-known form, but the category also includes bonuses, annual incentive plans, MBOs, SPIFFs, profit sharing, and equity. It reaches well beyond the sales team, and it is what makes payroll variable rather than fixed.
What is the difference between incentive compensation and commission?
Commission is one type of incentive compensation, specific to revenue-generating roles and usually calculated as a percentage of deal value. Incentive compensation is the whole category, which also covers bonuses, MBOs, and equity, and applies across the business. All commission is incentive compensation, but not all incentive compensation is commission.
What are the main types of incentive compensation?
Commission on closed revenue, bonuses for defined achievements, annual incentive plans tied to yearly performance, MBOs tied to specific objectives, SPIFFs for short-term pushes on a product or behavior, profit sharing tied to company profitability, and equity tied to long-term company value. Most companies use several of these at once.
Who receives incentive compensation?
Far more people than just sales. Account executives receive commission, SDRs and CSMs often receive MBOs, finance and HR staff may sit on an annual incentive plan, and equity or profit sharing can extend to the whole company. Restricting the concept to sales is what leads companies to misapply commission plans to roles that should not have them.
Is incentive compensation the same as variable pay?
Effectively yes, and the terms are used interchangeably. Variable pay describes the part of someone's compensation that changes with performance, and incentive compensation describes the mechanisms that make it change. The important distinction is not between those two, but between both of them and commission, which is only one instrument among several.
Why does incentive compensation need to be accrued?
Because it depends on performance and therefore is not known in advance. Salary can be budgeted a year out. Incentive compensation has to be estimated for the period in which it was earned, recognized as a liability, and then trued up when the actual figure is known. That cycle is the reason commission accrual exists as a discipline.