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.

What is incentive pay?
How does incentive pay work?
Examples of incentive pay

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.

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:

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.

Last Updated: March 2023

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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