What Is Incentive Pay and How Does it Work?

Incentive pay may be just what your business is looking for to motivate team members to push past plateaus into higher levels of performance. But what exactly is this type of compensation, how does it work, and what options could your business offer?

We’ll answer those questions in this article and introduce you to an app that can help you manage your workforce better.

Table of contents

• What is incentive pay?
• How does incentive pay work?
• Examples of incentive pay
• Other types of incentives
• Incentive pay for restaurants

What is incentive pay?

Incentive pay — sometimes abbreviated IP but not to be confused with internet protocol — is a reward you offer to your employees for performance rather than total hours worked.

Because most businesses use it to motivate their teams to higher performance and to keep their employees engaged, it’s usually separate from their base pay.

And, because it’s conditional on certain goals or key performance indicators (KPIs), incentive pay is not typically a mandatory form of compensation, nor is it always a given that an employee will earn the right to receive the reward.

Incentive pay vs. a bonus

Though the terms are often used interchangeably, there’s a significant difference between incentive pay and a bonus.

Take the year-end or holiday bonus, for example. In many ways, this reward for another year of service is tied to the success of the company.

But many employees come to expect it as just another part of their compensation — it doesn’t necessarily motivate them to work any harder or reach for new goals.

Incentive pay, on the other hand, is levied by a business as a way to drive future performance on a more immediate timetable (days, weeks, or months).

How does incentive pay work?

One of the nice things about incentive pay is that there’s no right or wrong way to use it. Nor is there any one type of reward that works best for every team.

Your business can build and run its IP program any way it sees fit. You just need to find what works for your employees and run with it.

So, for example, you may set up a program that challenges every server in your restaurant to upsell the chef’s special during the month of April.

As an incentive for their effort, you offer to reward them with an extra $5 in their paycheck at the end of the month for every chef’s special they sell.

So, if Anna sells 10 chef’s specials, she would earn $50 in incentive pay. If Joy sells 20 chef’s specials, she would earn $100 in incentive pay.

Whether you stick with a simple program like that or make things a bit more complicated — perhaps installing more milestones or KPIs to work with — is entirely up to you and what you think will motivate your team the most.

That said, there are two general classes of IP on which you can model your own program. Those classes are casual and structured.

Casual

Casual incentives stick to no set schedule and can be given to an employee at any time as a reward for reaching goals or exhibiting outstanding performance.

Casual incentives can take the form of anything from recognition to cash to a catered lunch.

Structured

Structured incentives are typically set to specific targets (e.g., sales or production) or distributed according to a certain timetable.

While they’re still tied to performance, these incentives usually take the form of more “valuable” compensation, such as stock options, paid holidays, or a raise in salary.

Examples of incentive pay

As we mentioned, there’s no right or wrong way to put incentive pay to use in your business, nor is there any one type of compensation that you have to offer. Experiment with the format and the reward that gets the best results.

Here are some examples of incentive pay that you can use in your program.

1) Cash

Cash is probably one of the most well-known forms of IP and is often the easiest to implement for new and developing rewards programs.

Consider offering an extra $100 to every salesperson that reaches a specific threshold or to everyone on the team for finishing a project by a specific deadline.

This is just one example of how you can use cash to motivate your team to achieve any goal you set.

2) Annual incentive pay

Annual incentive pay is a broader type of program as opposed to cash, which is a reward in itself.

This type of incentive program can be set up to reward team members who exhibit loyalty to your business and to motivate others to stick around.

For example, you may offer a cash bonus of $100 for every year an employee has worked for your company starting at five years.

So, on the five-year anniversary of their start date, you might choose to present an employee with $500 cash (or a check or direct deposit for safety) as a thank-you for their continued service.

3) Commissions

Commissions are another form of IP that are familiar to most people. According to the Department of Labor, a commission is, “a sum of money paid to an employee upon completion of a task, usually selling a certain amount of goods or services.”

Most businesses will set up a commission structure to motivate the salespeople on staff to reach a set threshold (e.g., number of sales, total dollar amount, percentage improvement, etc.).

4) Sign-on bonus

As incentive pay goes, offering a sign-on bonus can be an effective recruitment strategy that helps your business attract top talent.

Before you go out and offer cash to anyone who interviews, keep in mind that most businesses make this reward contingent on being hired.

5) Profit sharing

Profit sharing can be leveraged as part of an IP program so that employees earn a portion of the operation’s profits.

In most cases, the amount they earn depends on the business operating profitably, so employees may feel motivated to improve the company’s bottom line. They may also feel more personally invested in the business’s performance.

If you implement a profit-sharing IP, make sure the goals, milestones, and other benchmarks are clearly defined so that there’s no confusion about when this reward kicks in.

6) Stock options

You might consider offering stock options as a part of your IP program.

This form of compensation makes it possible for employees to purchase shares in the company (i.e., those owned by the business itself) at a price that is usually less than market value.

7) Alternative work schedule

Some IP programs don’t offer money at all. Instead, they offer less tangible rewards, like the option to work an alternative schedule.

For example, your business may choose to offer employees the chance to work a flex schedule if they reach certain benchmarks.

Under this type of work arrangement, team members can choose when they will clock in and when they will clock out within a certain period of time as long as they accumulate a full eight hours in one day and are “in the office” during set core time (e.g., 10 a.m. to 1 p.m.).

There are many different types of work schedules to choose from, so, if you want to offer this as part of your IP program, do a bit of research and choose the option that’s right for your team and your business.

8) Company car

If your employees do a lot of traveling for work, consider offering the use of a company car as a component of your incentive pay.

This reward is most often offered to salespeople and customer representatives, but it can also work well as a temporary reward for in-office employees.

For example, you might consider giving the first employee to reach a certain milestone the use of a company car for a month.

9) Referral pay

If you’re having trouble filling an open spot on the staff rota, consider offering referral pay as an incentive for your team members to send candidates your way.

You can either offer a small monetary reward for any names they provide or a large reward to whoever provides the name of a person who eventually gets hired into the business.

However you choose to structure this incentive, be sure to outline the program in as much detail as possible in your employee handbook so there’s no confusion, misrepresentation, or hard feelings among your existing team members.

10) Suggestion incentive pay

You can implement this type of incentive pay into your standard operating procedures as a way to show your employees that their opinions matter.

When a team member makes a suggestion that results in some type of improvement in your business (e.g., higher revenue, increased productivity, enhanced efficiency, etc.), reward that team member to show your appreciation and encourage future suggestions.

If you’re worried about this type of incentive cutting into your bottom line because of the potential for an excessive number of suggestions to come rolling in, be sure to stipulate that the suggestion must result in some type of benefit for your team or your business.

Establish very clear rules in your employee handbook and keep the prize small — even just $25 can be enough of an incentive to motivate people to share their thoughts.

Other types of incentives

Incentive pay comes in all shapes and sizes and doesn’t actually have to be cash (or even dollars of any kind). Your team may respond better to other types of incentives, like the promise of a pizza party or a work happy hour.

Here are some suggestions for incentive pay that don’t necessarily involve giving your employees money.

Redecorate the breakroom

Technically, an incentive is anything that motivates or encourages someone to do something, so why not get creative and inspire your team to achieve new goals by promising to redecorate the breakroom?

For example, create levels of achievement (or milestones along the way) and change a specific aspect of the breakroom once your team reaches each level.

You might choose to paint the walls and install new flooring at level one, bring in new tables and chairs (or other seating options) at level two, stock the break room with drinks and snacks at level three, install a TV at level four, and purchase a larger refrigerator at level five.

Your levels don’t have to be exactly the same — nor do they have to stop with five — but they should be something that would benefit or improve the work experience for your team.

If you’re interested in pursuing this type of incentive pay program, take a few minutes to read this article from the Sling blog for more ideas: 18 Break Room Ideas For Your Workplace.

Upgrade the coffee machine

Coffee is the blood that pumps through the veins of your business, so why not use that fact to your benefit? Promising to upgrade the company coffee machine is a great way to motivate your team to greatness.

Keep in mind that this incentive could be part of redecorating the breakroom or it could be an incentive all by itself.

However you choose to package it, set a short- or long-term goal and then offer to install a fancy coffee machine — something with a bit more oomph and flair than the $30 drip machine you’re currently using — once your team reaches the goal.

You can even extend the usefulness of this incentive by promising to bring in a barista for a day if the team exceeds the goal by some preset standard.

Play the lottery

With local and national lotteries regularly offering 10-figure prizes, lottery tickets can be an excellent incentive to offer your team.

Keep in mind that the drawings with the really big numbers may come up with only a week’s notice, so you won’t necessarily be able to set a goal and give your employees enough time to reach it.

But, you can set up the program, allow your team to work on reaching the goal, and then reward their efforts the next time a big jackpot comes along.

That said, don’t feel like you have to wait for the eight-, nine-, or 10-figure jackpots. Your employees may jump at the chance to win a few hundred or a few thousand dollars from the regular lottery scratch-offs or drawings.

Use this option as an individual reward for the best performance or as a team reward for all members to split once they’ve completed a task or reached a milestone.

However you choose to use lottery tickets in your business, they can be a fun and inexpensive way to motivate your team to stretch beyond their regular activities.

Experiment with flexible schedules

Another incentive that doesn’t involve handing out cash or writing a check is experimenting with flexible schedules.

Depending on the type of business you run, you may choose to try shaking things up a bit for a certain milestone reached by offering to allow team members to work:

• Four 10-hour days
• Rotating shifts
• 9-hour shifts Monday through Thursday and a 4-hour shift on Friday
• 80 hours in 9 days and then the 10th day off
• 6.5-hour shifts 6 days a week

Not all of these options will work for every business, but you can use the concept of a flexible schedule (however it fits within the framework of your regular activity) to give your employees something to reach for.

Incentive pay for restaurants

Not sure how to start an incentive pay program for your restaurant? Consider challenging your staff with one or more of these short- and long-term goals:

• Increase gift card sales
• Drive sales for a specific menu item
• Increase customer check size with suggestive selling
• Improve table turnover time
• Drive sign-ups for your customer loyalty program
• Expand product knowledge
• Refer a high-quality candidate for an open staff spot

Once you’ve got some goals in mind, list them in the first column of a spreadsheet.

In the next column, list all the ways your team could reach those goals. Then, in the next column, transform those initiatives into contests, challenges, or games that you can use to motivate your team.

For example, you may choose things like:

Server bingo — Create a bingo card with menu items and upsell opportunities and then challenge employees to complete a row, four corners, or the entire card.

Sales contest — Challenge team members to see who can sell the most of a specific or general menu item.

Server poker — Each time an employee sells a certain menu item or does something noteworthy (as judged by the manager on duty), the employee gets to choose a card. At the end of the day, week, or month, whoever has the best poker hand wins a prize.

Positive review contest — Challenge team members to elicit as many positive reviews from customers (via comment card or online platform) as possible. Staff should encourage customers to use the staff member’s name in the review so managers can see who gets the credit.

Good job bucks — Managers carry “good job bucks” with them and reward employees when they (the managers) see someone doing a good job. Staff members can use the “good job bucks” to pay for menu items, merchandise, or other prizes you may implement, such as:

• Gift cards (to places like Amazon, Target, Starbucks, or a local gas station)
• Free food from your restaurant
• A specific holiday off (use as a prize for a long-term contest so the time off doesn’t get out of control)
• Shift coupons that grant holders their choice of section, the ability to opt for no side work, or the privilege of being first off on a specific shift

There are many ways to implement your own unique incentive pay program so don’t rely solely on these suggestions.

Instead, use them as a jumping-off point, get creative, and design a set of goals, challenges, and rewards that work for you, your restaurant, and your team.

Manage performance and pay with Sling

Implementing incentive pay means that your business will need to track performance as well as total hours worked, time on task, and other variables.

That can get complicated very quickly unless you incorporate a solution like Sling.

The Sling app can help you manage your workforce better with:

• Automated employee breaks
• Premium Pay in case employees miss a break
• Powerful scheduling features
• Labor cost controls
• Built-in time clock
• Communication tools
• Task management

With help from Sling, you’ll be better positioned to monitor your team’s performance so that your incentive pay program is a roaring success.

For more free resources to help you manage your business better, visit GetSling.com today.

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This content is for informational purposes and is not intended as legal, tax, HR, or any other professional advice. Please contact an attorney or other professional for specific advice.

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