What Is Incentive Pay? A Complete Resource Guide

by Corey Philip

October 10, 2021

Did you know that companies in the U.S spend more than $100 billion on incentive programs annually? Spending is a crucial aspect because it allows them to motivate their employees. After all, a motivated employee means higher productivity and better business.

Many organizations use the power of incentive pay to keep their employees happy and productive. If you are wondering what is incentive pay and how it works, you are in the right place. Here is your complete resource guide to incentive pay.

What Is Incentive Pay?

As the name suggests, incentive pay is a financial performance reward for employees in the organization. Organizations think that offering incentive pay will help motivate the employee to hit specific performance targets and goals. The most popular example of incentive pay is the commission salespeople get on each item they sell.

Many people confuse incentive pay with casual incentives, but they are not the same. For example, incentive pay is monetary, while casual incentives can be gifts, tickets, or something else. So, now that you know what is incentive pay let's move forward.

Reasons Why An Organization Might Offer Incentive Pay

Here are the top reasons why an organization might employ the power of incentive pay:

1
To Enhance Productivity: That is the top reason why many organizations offer incentive pay to their workers. It allows them to encourage employees to become more efficient and reduce wasting time. A business needs to create specific but balanced goals while offering an incentive to allow employees to achieve those goals. You should also remember that not all employees are motivated by money, which is why you can offer other things with the incentive pay. It will allow you to enhance productivity in your organization in the best way possible.
2
To Enhance Employee Morale: Incentive pay will help employees understand the relationship between performance factors and rewards. The employees will see that their hard work and performance reap a reward, which will improve morale, confidence, self-esteem, and much more. In the long run, it will help your organization create a positive environment. Sometimes employees don't understand how a compensation system works, and it leads to confusion. That is why it is vital for an organization to show the connection between rewards and performance. It will allow employees to engage in meaningful ways and perform well.
3
To Improve Return On Investment (ROI): If employees are productive, it will help an organization to meet its goals and increase profits. That is why incentive pay can be a fantastic tool to boost return on equity (ROE) and ROI. Employees will take an interest in the organization and its overall health. That is why in the long run, incentive pay can help you boost profitability. To achieve this, it is crucial to align the interests of the company and the employees for profitable and productive results. Once you do, you will notice the results in no time.

Incentive Pay Examples

There are a few ways to offer incentive pay to workers; it is not just cash. Of course, offering cash is the most popular option among organizations. You can decide the type of incentive pay that will work best for your employees and business.

Here are the top incentive pay examples:

Cash

Cash is the most popular form of incentive pay, and many organizations use it to achieve certain performance goals. However, even within cash, there are many forms of rewards. These include:

Sales Commission: Many organizations pay commission to their sales staff on each item sold. It allows salespeople to work harder and meet company goals.
Bonuses: Non-sales staff can work with bonuses for one-time improvements. It is crucial to audit the improvement and then offer incentive pay
Production-Based Incentive Pay: The production-based format is famous for companies that can offer incentive pay based on the number of units produced. It will motivate employees to enhance production
Performance-Related: You can offer a performance-related incentive pay based on the number of improvements an employee makes in a certain period. The performance goals must be realistic and measurable

The second most popular example of incentive pay is offering shares in the organization to employees. Remember that this is a much more complex form of incentive pay than cash. However, you can offer shares if you want your employees to build a long-term commitment to the organization.

All you have to do is give your employees the right to buy shares in the company at the current price at a later date. If the share value has increased by the time they decide to exercise their right, they will benefit from a profit. Shares as incentive pay will only work if your employees want to be at the company for a long time.

Other Forms Of Incentive Pay

You can also offer non-financial incentives to your employees. These include offering various things such as vouchers, tickets to an event, a company car, healthcare, or much more. The options are endless here, and you can use your creativity to offer the best non-financial incentives.

Pros Of Offering Incentive Pay To Employees

Here are the benefits you can reap from offering incentive pay to employees:

Encourages Employee Retention: Good incentive pay will help you retain your employees in the long run. That is because it will increase loyalty to the company and overall job satisfaction. That is why it is crucial to structure the incentive pay in the best way possible. Whenever employees feel that the organization does not appreciate them or compensate them fairly, they tend to look for new opportunities. Because of this, your turnover rate can increase. However, incentive pay can help you motivate and engage your employees so they can feel appreciated and compensated for their hard work.
Boosts Productivity Among Employees: Incentive pay directly affects productivity in the organization. That is because creating a structure that recognizes employees for delivering tangible results emphasizes the idea that good performance in the company will be rewarded. It allows you to treat employees based on merit and performance. Besides that, if you are offering incentive pay at the team level, it will aid high performers to help the low performers to improve results. Because of this, incentive pay can help boost individual and team productivity in the organization. So, if this is the benefit you want to reap, using incentive pay is one of the best things you can do for your business.
Communicates Company Vision And Mission: Unless your employees know what your goals and objectives are, they can’t help you meet those targets. When you offer incentive pay related to certain performance targets, it can help you convey the company objectives to your employees. Doing this clarifies what you expect of them and what you want your organization to look like in the future. So, the employees will work hard to help you achieve your organization's objectives, vision, and mission. Everyone will use different ways but meet you towards the same goal. If you feel that the message of your organization is lost on employees, introduce incentive pay aligned with your vision.

Pros Of Offering Incentive Pay To Employees

Here are some cons you might experience when offering incentive pay to employees:

Can Lead To Possible Conflicts: While incentive pay can enhance teamwork, it can also create conflicts between people in your organization. In an intensely competitive and toxic workplace, employees might engage in bad behavior to reach goals to achieve incentive pay. There needs to be checks and balances to avoid such behavior in the organization. So, it is crucial to implement an incentive pay properly and let employees know how they are valued in the process. Otherwise, competition can get unhealthy and negatively affect the workplace environment and culture.
Can Encourage Deception: There is a high possibility that incentive pay can encourage deception in the organization. That is because employees who want to benefit from incentive pay can look for means to make their performance appear better than the actual misaligned results. It is nothing new and has happened in many firms before. The most famous example is that of the Phoenix Veterans Affairs Health Care System. VA hospital managers in 2014 created a scheme to falsify patient wait data to avoid poor performance being reported. So, it is crucial to encourage healthy competition and equal incentives to avoid deception.

Final Words

That was your complete resource guide on what is incentive pay and everything you need to know about it. If you plan to implement incentive pay in your organization, be sure to implement it fairly and appropriately. Align it with your business objectives and ensure your employees know the reasons for it.

Once you do, you will reap the many benefits that incentive pay has to offer to organizations. When used in the appropriate manner, an incentive pay program can help take your company to the next level.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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