Incentive Pay Plan: Definition & Examples Outlined For HR

What is an incentive pay plan? Read on to find out.

3
 min. read
March 9, 2022
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Incentive pay is a great way to boost employee engagement and can be a great recruitment tool to help attract top talent.

If you’re unfamiliar with incentive pay plans and you’d like to learn how you can bring them to your organization, keep reading!  

Once you have a good understanding of incentive pay, you can help your company prepare to put one in place. Not only do these programs benefit employees, but they also benefit your organization by positively reinforcing great performance and determination. 

What Is An Incentive Pay Plan?

An incentive pay plan is a compensation strategy that rewards employees who perform well. For an incentive pay plan to be put in place, you will first need to establish a framework that clearly outlines the criteria employees need to meet to earn a specific reward.

The actual incentives should vary on a business-by-businesses case, as some companies may choose to use sales commissions, whereas others would prefer share options. Other options might include a one-time cash bonus. 

Companies put individual incentive pay plans in place to keep engagement high, build a better rapport with employees, and attract new talent. Simple put, they are used to reward employees who go above and beyond their everyday duties.

Incentive pay is often confused with merit pay, but there is an important difference. Merit pay is a permanent reward for an employee’s continued achievements and commitment. Instead of a one-off bonus given as part of an incentive plan, merit pay typically means an increase in salary.

How To Implement A Pay Plan

There are two ways to implement an incentive pay plan. The first option is to create periodic and systematic employee reviews for individual employees. 

A supervisor, manager, or HR representative would evaluate an employee’s overall performance over time. Then, using criteria such as teamwork, initiative, and goal attainment, they would determine if an employee is eligible for incentive pay.

Another way to implement incentive pay plans is to reward employees based on their group or department’s performance. By using the success of the team as your starting point, you can determine how much each individual employee will receive based on their specific contributions.

Examples Of Incentive Pay Plans

  1. Monetary Incentives

Financial incentives can include commission and cash bonuses based on an employee's continued performance. For example, an employee can receive a one-time payment when they hit sales quota. This is called commission pay.

In some situations, companies can choose to pay people on a commission-only basis, but commissions are generally used as supplementary compensation on top of their base salary.

Cash bonuses are provided to employees for exceptional performance but might not be directly linked to any one metric like commissions generally are. Cash bonuses may also be used to reward people for joining or staying with your company. 

  1. Profit-Sharing 

Profit-sharing plans involve paying employees in the form of cash bonuses or stock options that are derived from the company’s annual profits. These plans are usually structured so that employees are rewarded and paid annually. 

Profit-sharing is a highly effective way to make employees feel the impact they have on the impact.

  1. Company Shares 

When an organization puts a share incentive payment plan in action, they are essentially allowing their employees to buy shares of the company’s stock at a discounted rate. Employees may also receive potential tax benefits from this. 

This incentive pay plan benefits not only the employees but the overall company as well. Owning shares in the business gives employees a stake in the company’s future and it can incentivize them to work harder to ensure the company’s success.

  1. Career Incentives

Career incentives are usually geared towards helping an employee develop their professional skills and improve their career opportunities.

These incentives can be offered in various forms. Some include reimbursing employees for their academic tuition, allowing employees to attend important and beneficial conferences, offering company-funded training courses, or even professional development stipends.

Another great way for a company to incentivize their people is by providing mentorship opportunities, especially for entry-level employees. Certification training is ideal for employees who are studying and working towards improving or expanding on their pre-existing professional skills. 

  1. Other Incentives

When considering incentive pay, you may be analyzing everything your company needs to include to effectively engage employees. However, not all incentives require a major investment.

This is where forms of incentives such as flexible work arrangements, and fringe benefits come in. Employees who receive non-cash incentives earn a different kind of reward for exceptional performance. 

One of the most common examples is the use of a company car. While your employees may still need to pay income taxes for this incentive, most employees would enjoy being rewarded with the freedom of using a company car. 

Another popular incentive includes allowing an employee to adjust their work arrangements. In recent years, and especially due to Covid-19, this incentive has become extremely popular. 

The popularity of working from home is skyrocketing. But there are still tons of employees who want this opportunity. Flexible work is an especially advantageous incentive for employees with disabilities and working parents. 

Other non-cash incentives include recognition programs such as employee of the month. Your staff may appreciate a reward along with this such as a company lunch, vacation, health club membership, or tickets to a local event