Incentive Compensation: What It Is & How to Structure a Plan (2023)

Incentives are natural motivators — and sometimes, some "natural motivation" is exactly what your salespeople need to perform to the best of their abilities. That's why several companies leverage something known as incentive compensation: the practice of offering financial rewards for professional excellence.

Incentive Compensation: What It Is & How to Structure a Plan (1)

Here, we'll take a closer look at the concept, see some examples of what it looks like in practice, go over how you can put an effective incentive compensation plan together, and review some of the preeminent incentive compensation software on the market. Let's dive in.

What is incentive compensation?

Incentive compensation refers to a category of compensation methods where a salesperson's pay is at least partially and directly connected to their individual sales efforts, the revenue they generate, their team's success, or the success of their company as a whole.

Incentive compensation plans often provide an effective avenue for sales leadership to motivate their teams and encourage overperformance. Meaningful incentives influence behavior in any context, and sales is no exception.

Without incentive compensation, reps might be less inclined to exceed or even meet quota routinely. By extending some sort of performance-based financial reward, you can provide some extra oomph to encourage your reps to stay on top of their sales efforts — well beyond the bare minimum.

There are several brands of incentive compensation. Let's take a look at a few potential methods you can leverage to get more out of your sales team.

Incentive Compensation Examples

1. Gainsharing Plan

A gainsharing plan is an incentive compensation model where an organization incentivizes employees to overperform by offering financial shares of the business gains that stem directly from their improved individual performance.

2. Retention Bonus

A retention bonus is a financial bonus a company offers an employee — typically calculated as a percentage of that employee's base pay — for staying with the business for a predetermined period.

3. Profit-Sharing

Profit-sharing is similar to gainsharing in that it offers employees incentive payments based on a company's financial gains. The difference is that gainsharing rewards salespeople for their individual performance whereas profit-sharing rewards employees for a company's overall profitability.

4. Spot Awards

Spot awards are generally small incentives — either financial or non-monetary — offered to recognize individual employees for exceptional short-term performance.

5. Annual Incentives

The term "annual incentive" typically refers to a one-time, lump-sum payment made on top of a salesperson's normal compensation for a fiscal year based on how they performed within that time frame.

Incentive Compensation: What It Is & How to Structure a Plan (3)

Long-Term Incentive Compensation

While most incentive compensation plans are generally employed on a short-term basis, there are some plans that companies leverage to incentivize loyalty and overperformance over more extended periods.

Incentives like restricted stock-based packages and cash bonuses — awarded to employees after reaching certain long-term goals or staying on at the company for specified time frames — are examples of long-term incentive compensation.

Now that you have a picture of what an incentive compensation plan might look like, let's see how you can go about putting one of your own together.

Incentive Compensation Plans

1. Planning

Any effective incentive compensation plan starts with considerable thought and extensive planning — winging it won't cut it here. You need to start structuring yours a few months out (at least) and create a definitive, predictable framework that your reps can understand and reliably work within. Getting there involves addressing a few key elements.

Aligning With Organizational Goals

Before you can start piecing your incentive compensation plan together, you need a solid grip on what you hope to accomplish with it. Consider your company's broader quantitative organizational goals. Are there specific numbers you're looking to hit?

Your plan is going to be guided, in large part, by those figures. They're central to setting realistic, effective quotas for reps — and incentive compensation plans often revolve primarily around reps attaining or exceeding quota.

Once you have this side of the plan drilled down, you can start to take a closer look at how you can most effectively motivate your reps to deliver on those objectives.

Determining How You'll Motivate Your Team

Different kinds of reps are going to be receptive to different kinds of incentives. A program that suits a team of account executives might not align with one that can most effectively accommodate a crop of SDRs.

For instance, lower-level reps might be interested in a performance-based competition for who can schedule the most demos whereas more seasoned reps might be more motivated by a program that offers a financial incentive for exceeding annual quota.

No matter what framework you elect to go with, make sure your plan is appropriately tailored to align with your team's interests and individual priorities.

2. Continuous Reporting

Structuring an effective incentive compensation plan is an ongoing process. That's why constant reporting is crucial to refining your program and keeping it running as smoothly as possible. You need to keep key stakeholders in the loop and have a pulse on how your sales org is performing if you want to get the most out of your plan.

Reports that let reps keep tabs on their performance relative to quota, track high-level organizational performance, capture manager evaluations, and give hard pictures of how effective your plan is all need to be accounted for when implementing an incentive compensation plan.

All told, you need consistent visibility into the ins and outs of your program. That starts with you identifying the most relevant metrics and reports — and continues with you tracking them intently.

3. Clear Communication

Your reps can't operate within your incentive compensation plan framework if they don't understand it. So if you want to see the results you're looking for, you need to thoroughly explain what's expected of them and what they can expect to receive if they perform to the standards you set.

Let your team know your organizational goals and how the compensation plan will play into them. Listen to any concerns they might raise. Your goals have to be realistic and reasonably attainable. If most of your team takes a look at your objectives and tells you that they don't think they'll be able to meet them — even with incentives — you might want to reevaluate your strategy.

4. Evaluation

Let's say you run your incentive compensation plan for a quarter. Once that window is up, you're going to need to determine whether the program was effective and worth repeating. That's where conducting comprehensive evaluations comes in — from both higher-level and ground-floor perspectives.

Take a close look at the key metrics you landed on for gauging the success of your program. Did you reach your goals on an organizational level? How did the figures you hit stack up against the ones you projected?

And how did your team fare personally within the confines of the plan? Did the program put too much strain on morale? Make sure you consider the impact of your incentive compensation plan holistically — considering both the program's broader efficacy and impact on employee wellbeing.

You'll also want to factor in elements beyond your sales org's control. Changing economic tides and shifting market circumstances will play pivotal roles in shaping your organizational goals and, in turn, how you structure your incentive compensation plan.

5. Calculated Improvements and Optimization

As I mentioned, putting together an effective incentive compensation plan is an ongoing process. There is almost always room for improvement as yours progresses. That's why optimizing your program is much more of a "need-to-do'' than a "nice-to-do."

Consistently collect feedback from any stakeholders involved in the process — from reps to management. That will help you identify gaps in your program like issues stemming from outdated tech or lack of direction from leadership.

From there, you can start to update and refine your plan at allotted intervals — usually on a quarterly, semiannual, or annual basis. Using the insight you've accrued through your evaluation, you can modify your plan to suit stakeholders' needs and adapt to changing circumstances beyond your sales org.

These changes can include upgrading your tech stack, developing a more structured governance model, adjusting goals, accommodating changes in company strategy, or building around product launches.

Incentive Compensation Management Software

1. QuotaPath

Pricing: Free Plans Available — Paid Plans Starting at $288 per Year

Incentive Compensation: What It Is & How to Structure a Plan (4)

QuotaPath provides a centralized, accessible platform that covers all of the bases needed to structure and implement a productive incentive compensation plan — along with a range of other compensation-based applications.

The platform directly integrates with your CRM, allowing you to easily keep tabs on earnings and closed deals — providing you with a complete, responsive basis for your incentive compensation program.

Best for Versatility

QuotaPath is a dynamic incentive compensation solution that allows for a range of plans — and that kind of versatility is what really sets it apart from its competition. The platform offers the resources to structure self-guided and collective incentive compensation plans.

Its tracking, gamification, and team goal setting features can both create an air of incentive-driven competition and encourage teams to earn incentives together. If you want a first-rate solution that can reliably support virtually any kind of incentive compensation plan, look into QuotaPath.

2. CaptivateIQ

Pricing: Available Upon Request

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CaptivateIQ is one of the preeminent incentive compensation management solutions on the market. It takes the legwork out of implementing and sustaining an effective incentive compensation plan through its powerful automation capabilities. And its seamless data sharing features affords both leadership and reps insight into team and individual performance.

Best for Ease of Use

CaptivateIQ really sets itself apart from its competition with its accessibility and ease of use. It has a straightforward interface that reconciles simplicity with powerful functionality. If you're interested in an effective incentive compensation management program that everyone in your organization can easily pick up, consider going with CaptivateIQ.

3. Xactly Incent

Pricing: Available Upon Request

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Xactly Intent is a solid incentive compensation management program. It boasts impressive payout time-saving figures — routinely cutting compensation administration time by up to 60%. The solution also has a bank of 15 years worth of pay and performance data to draw from for guiding effective plan design.

Best for Constant Accessibility

Xactly Intent's main differentiator is in its consistent accessibility for leadership and reps alike. The program is mobile-friendly and available on-demand — offering sales teams clear views into their results and potential earnings wherever, whenever. If you need an incentive compensation management solution that your team can readily access on a dime, check out Xactly Intent.

4. Spiff

Pricing: Available Upon Request

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Spiff boasts an impressive customer base — including big names like Qualys, Qualtrics XM, and Lucid — and for good reason. The program provides real-time commissioning, personalized dashboards for individual team members, and adaptability when it comes to adjusting commissions and bonuses.

Best for Scalability

The solution's customer base isn't limited to the heavy hitters listed above — it suits smaller businesses just as well as large enterprises. And that's where the program's strength lies: scalability. If you're looking for an incentive compensation management software that can easily grow with you as your business expands, look into Spiff.

5. Anaplan

Pricing: Available Upon Request

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Anaplan provides an effective, sophisticated solution for businesses looking to model functional incentive compensation plans. The program offers refined modeling, real-time signals, and robust collaboration capabilities to help companies structure plans that deliver results.

Best for Scenario Modeling

While it boasts an impressive suite of other features, Anaplan distinguishes itself through its scenario modeling features. It allows sales teams to create unlimited "what-if" scenarios to help businesses reliably evaluate adjustments — providing insight into how changes will impact a plan's potential success.

6. Everstage

Pricing: Available Upon Request

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Everstage offers a no-code commission automation solution that suits virtually any kind of customer-facing team — from SDRs to CSMs. Created by a team of RevOps professionals, the software is tailored to streamline the incentive commission plan structuring process with features like real-time data aggregation and in-platform exception requests and approvals

Best for an Extensive Suite of Integrations

One key element that Everstage nails particularly well is its suite of integrations. The program syncs with several other programs, including HubSpot, Salesforce, Pipedrive, and Intuit Quickbooks. If you're looking for a powerful incentive compensation solution that lines up with your existing tech stack, check out Everstage.

7. ElevateHQ

Pricing: Available Upon Request

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ElevateHQ offers both no-code and low-code workspace to automate any plan under the sun. It has all the table stakes, bells, and whistles that you’d expect from a market leader without any additional costs and confusion.

Best for Quick Implementation and Established ROI

Elevate recently bagged the “Fastest Implementation” and “Best Established RoI” badges in’s Spring 2023 reports. That’s because ElevateHQ offers an extended implementation team at no additional cost. This team automates the most complex of plans within 28 days and is available to customers over Slack whenever they hit a wall.

See results with a well-structured incentive compensation plan.

The soundness of your incentive compensation plan could be the difference between fostering overperformance across your sales team and having your reps plateau or get complacent.

If you elect to leverage one of these kinds of plans, make sure it lines up with both your organizational goals and your team's bandwidth. If you can address both of those elements effectively, you can put together a plan that will pay off in spades.


What is the incentive compensation structure? ›

Incentive compensation is a form of variable compensation in which a salesperson's (or other employee's) earnings are directly tied to the amount of product they sell, the success of their team, or the organization's success.

What is an example of an incentive compensation plan? ›

Incentives like restricted stock-based packages and cash bonuses — awarded to employees after reaching certain long-term goals or staying on at the company for specified time frames — are examples of long-term incentive compensation.

What is an example of compensation structure? ›

In the public sector, it's very common to use a step or grade compensation framework. For example, the military grades all active-duty employees, paying them the same amount per grade and rank regardless of job type. Many private sector companies use independent systems to evaluate their overall pay scheme.

What is the purpose of incentive compensation? ›

Definition of incentive compensation

Its aim is to motivate staff - i.e., to encourage employees to target their actions and adapt their behaviours in order to produce the level of qualitative and/or quantitative performance expected by the company.

How do I write a compensation plan? ›

How to create a compensation plan
  1. Determine your compensation philosophy.
  2. Outline job architecture by defining roles and levels.
  3. Create guidelines for performance evaluations.
  4. Define direct compensation (salary, bonus, and equity)
  5. Add in benefits.
  6. Implement a pay equity process.
  7. Conduct post-hoc reviews.
Jul 7, 2022

What are the three types of incentive plans? ›

10 financial incentive types
  • Bonuses. Employee bonuses are one of the most common types of financial incentives that companies use as regular reward incentives and to show appreciation. ...
  • Referral programs. ...
  • Extra allowances. ...
  • Commissions. ...
  • Employee stock options. ...
  • Profit shares. ...
  • Co-partnerships. ...
  • Wage incentives.
Mar 10, 2023

What is the most basic form of incentive compensation? ›

Sales Commission Structures: This is the most common form of incentive compensation.

What is a good incentive plan? ›

A well-designed incentive program has a clearly defined goal, establishes rules, makes rewards visible, focuses on goal commitment, embraces competition and leverages risk, among other aspects.

What are key elements of a compensation plan? ›

A compensation plan, also referred to as a “total compensation plan,” encompasses all of the compensatory components of a company's strategy – employees' wages, salaries, benefits and total terms of payment.

What are the five steps in compensation planning? ›

5 Steps to a Compensation Strategy That Helps Your Company Thrive
  • Start by thinking about your organization's culture, business strategy, and HR strategy. ...
  • Consider what you want to reward. ...
  • Look at your talent landscape. ...
  • Weigh what you can afford to do against what you're willing to do. ...
  • Gain executive buy-in.
Mar 22, 2017

What are incentive plans in simple words? ›

What is an incentive plan? Incentive plans are a type of employee compensation structure that uses certain rewards to motivate team members to work harder and achieve specific goals.

What are the two main types of incentives? ›

There are two types of incentives that affect human decision making: intrinsic and extrinsic.

What are the methods of incentive plan? ›

Individual incentives may be based on time or output. In time based plans, a standard time is determined and incentive is paid if any employee completes the job in less than standard time. In output based plans, a standard of output is determined and an employee producing more than standard output is given incentive.

What is the best compensation structure? ›

Market-Based Structure

This structure still uses pay grades, and it can be set at a minimum that's on par with what your competitors pay. This is the most popular system, and it can alleviate anxiety over not paying your workers enough to retain them.

What are the four 4 kinds of compensation? ›

These methods of compensation are a direct exchange of pay for work performed and include the four primary compensation types, hourly pay, salary, commissions, and bonuses.

What is compensation in kind examples? ›

Payment in kind is non-cash remuneration received by an employee for work performed. This can include: food, drink, fuel, clothing, footwear, free or subsidized housing or transport, electricity, car parking, nurseries or crèches, low or zero-interest loans or subsidized mortgages.

Who benefits from incentive pay? ›

Employee incentive programs allow companies to improve productivity, reduce employee retention, and lower production costs. It builds engagement among employees to encourage teamwork, boost morale and motivation. Both the employees and employers benefited from the incentive programs.

How do you create a compensation plan that motivates employees? ›

Here's how you can use your compensation plan to retain and motivate employees and up your sales in a down market.
  1. Pay employees salary and incentives. ...
  2. Keep the incentive part of your plan simple. ...
  3. Establish SMART goals. ...
  4. Determine what your competitors are paying. ...
  5. Modify salaries based on employees' geographic location.
Jan 19, 2012

How can I improve my compensation and benefits? ›

How to improve compensation and benefits
  1. Evaluate pay policies. Pay policies are the guidelines dictating how much to pay employees. ...
  2. Conduct a market analysis. ...
  3. Develop a pay structure. ...
  4. Conduct employee surveys. ...
  5. Bonus and incentive programs.
Jan 22, 2023

What are characteristics of the best incentive compensation plans? ›

What are characteristics of the best incentive compensation plans? They link rewards to performance. They are agreed on by both employees and managers. Which types of reinforcement are intended to weaken a behavior?

What is an example of an individual incentive plan? ›

Some individual incentive plans include cash bonuses, stock shares, non-cash prizes, compensation time, professional development opportunities, and profit sharing.

What is the most common type of compensation? ›

Direct compensation tends to be one of the most common forms of compensation. It includes money paid to employees as cash, salaries, bonuses and commission. Both hourly rates and salaried work will fall under this category. Within direct compensation, there are two subcategories of base pay and variable pay.

What is the difference between a bonus and an incentive? ›

Bonuses — like all incentives — are separate from salary and commissions. They are awarded at the employer's will and decided upon once reps have hit their targets. The primary difference between bonuses vs. incentives is that incentives are decided upon ahead of time, while bonuses are granted after goals are met.

What is employee incentive compensation? ›

Incentive pay is a form of compensation employers choose to offer employees as a way to motivate high performance. In other words, incentive pay is separate from base salary in that it is designed to encourage—it is not a mandatory form of payment by the employer nor is it a given bonus for the employee.

What are 2 examples of positive incentives? ›

Positive incentives can include praise, bonuses, career advancements, earning extra vacation days, gift certificates and other monetary rewards.

What is the most effective incentive to employee? ›

Recognition is the most impactful type of motivation for employees because it's emotionally fulfilling. Emotional fulfillment is at the top of Maslow's Hierarchy of Needs, and when an employee feels emotionally satisfied on the job, they are likely to stay at your company longer, do better work, and be more productive.

What are 3 positive incentives? ›

Coupons, sales, freebies, discounts, and rewards can be positive economic incentives. They are called positive because they are associated with things many people would like to get.

What is the most important factor in developing a compensation plan? ›

Salary is the most important component of a compensation strategy and makes up the bulk of total compensation, with benefits, bonuses, and perks making up the rest of the package (we'll discuss each of these in subsequent sections).

What is the first step of compensation plan design? ›

Create a compensation committee

The first step is to create a compensation committee made up of senior management and at least one HR professional. Try to keep it to an odd number, with three or five members who represent a cross-section of the organization's leadership.

What are the six types of incentive plans? ›

Motivate Your Employees With These 6 Incentives
  • Recognition-Reward Programs. ...
  • Tuition Reimbursement. ...
  • Profit Sharing. ...
  • Employee Referrals. ...
  • Health & Wellness Programs. ...
  • Additional Time Off.
Aug 25, 2021

What is incentive structure theory? ›

The incentive theory of motivation is a behavioral theory that suggests people are motivated by a drive for incentives and reinforcement. The incentive theory also proposes that people behave in a way they believe will result in a reward and avoid actions that may entail punishment.

What are the three main categories of incentive pay plans? ›

What types of incentive payment are there?
  • Annual bonus: Defined as an annual payment that's generally based on a worker's annual salary. ...
  • Signing bonus: A one-time reward given when a candidate commits to working for a company.
  • Discretionary or spot bonus: A one-time cash payout that rewards past work.

What is an example of an incentive theory? ›

Incentive theory on the other hand, states that people are motivated by external rewards. For example, a person who is motivated to do to work everyday because he/she enjoys receiving a fat paycheck, an external incentive.

What is an example of incentive motivation? ›

Good grades are an incentive that can motivate students to study hard and do well in school. Gaining esteem and accolades from teachers and parents might be another. Money is also an excellent example of an external reward that motivates behavior.

What is an example of an incentive in everyday life? ›

For example, a rise in the price of any good is an incentive for us to back off from buying it as much as we used to. Perhaps we'll buy a different good instead. So, for example, a rise in the price of butter creates an incentive to buy less butter.

What are the two types of incentives? ›

There are two types of incentives that affect human decision making: intrinsic and extrinsic.

What is the best form of compensation? ›

What are the Best Forms of Compensation for Your Employees?
  1. Base pay package. Base pay package refers to the standard compensation an employee receives for working a previously set number of hours. ...
  2. Equity package. ...
  3. Bonuses. ...
  4. Commission. ...
  5. Benefits and Perks. ...
  6. Non-Financial Compensation.
Oct 31, 2022

What are the most common forms of incentives? ›

Employee bonuses are one of the most common types of financial incentives that companies use as regular reward incentives and to show appreciation. They might do so by offering cash bonuses or including a monetary bonus in employee paychecks.

What does incentive plan include? ›

Incentive plans are a type of employee compensation structure that uses certain rewards to motivate team members to work harder and achieve specific goals. This type of compensation goes beyond the paycheck and benefits that all employees should receive for the hours they work.


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