This is the issue that incentive compensation management is attempting to address. It aims to automate the creation and management, optimization, and monitoring of incentive plans to improve their effectiveness as a strategic planning tool. A well-designed incentive compensation system aligns wider business objectives with the motivations of sales professionals.
We will explore both the fundamentals and intricacies of incentive compensation. We will also share some key pointers for creating programs that both motivate your employees to support company growth.
What is incentive compensation management?
Incentive compensation management is a form of payment that rewards employees, typically sales staff specifically, for meeting specific goals or targets. It’s often linked to company or individual performance and has the goal of incentivizing employees to perform their work as efficiently as they can and to achieve greater outcomes.
Incentive pay can take a variety of forms, such as bonuses, stock options, and commission-based pay arrangements.
Although incentive compensation is typically used to pay the sales team, it’s common for other roles to be eligible for incentive payments. People who work within selling operations and customer service, recruiting, and marketing are typically entitled to incentive compensation that is higher than their basic salary.
How does incentive compensation management work?
Incentive compensation management works by automating calculations of commissions and bonuses. Earnings are monitored in real-time, providing sales reps with visibility to the progress of their payouts and how they are being paid. A good incentive compensation management software should simplify the process of managing comp plans, and also make adjustments and updates.
On a larger scale, incentives must be aligned with sales strategies and business objectives. The incentives and compensation aren’t part of the salesperson’s base salary. For example, variable compensation product quality can be assessed through performance.
The software required to manage incentive compensation should ideally be fully integrated into your sales CRM to gain access to the information needed to calculate compensation and also to provide reps with insight into the reasons and methods by which they’re getting compensated.
Also read: Enterprise Compensation Management: Best Practices for Organizational Success
Why is incentive compensation management important?
Incentive compensation management is crucial for several reasons.
- Team behavior is aligned with corporate goals.
- Improves morale and retention through offering fair and transparent payouts through real-time dashboards.
- Reduces time and errors by automating manual processes and standardizing incomplete data inputs.
- Encourages the recruitment of top talent through offering an attractive, transparent pay structure.
- Improves financial planning and forecasting by tracking incentives accurately.
- Companies that fail to monitor compensation effectively or with accuracy will likely face many challenges. which are discussed below.
Long-term incentives vs. short-term incentives
In general, incentive compensation is classified into two categories: long-term rewards and short-term rewards.
Long-term incentives are given over a period of time, or years. These can comprise stock options and restricted stock units, performance shares, or any other equity-based rewards that are vested over time. The purpose of these incentives is to align the needs of employees with the long-term performance of the business, since they are rewards that typically increase based on the company’s performance.
Short-term incentives, on the other hand, are usually granted and distributed during this fiscal year’s financial period, quarter, or semi-annually. They are usually tied to specific goals for performance or targets, and can comprise commissions, bonuses, or other rewards based on performance. Short-term rewards are designed to improve performance over a short time period and give immediate rewards for employees according to specific targets.
Certain types of incentive compensation
Let’s look at a quick breakdown of a few of the kinds of incentive-based compensation organizations might offer
- Performance-based bonuses reward employees who have achieved certain targets or goals in relation to their particular job.
- Restricted stock units (RSUs) give employees shares of the company’s stock. They usually become vested over time and are completely owned by the employees after they have they have vested. RSUs are usually provided by publicly traded companies that want to keep and attract the most successful employees.
- Profit-sharing bonus provides a company share to employees, typically on a quarter or yearly basis, encouraging them to cooperate to increase business profits.
- Commission-based pay gives a percentage of the sales to those who produce sales.
Certain companies use just one type of incentive payment, while others employ different types of incentive compensation to build a more comprehensive incentive compensation plan.
Different types of incentive plans are leveraged differently. Certain businesses offer the sales team commission only, for instance, while others pay commissions in conjunction with the base salary. What works well for one business may not work at all for another, so it is wise to explore various incentives until finding one that meets the goals and needs of both companies.
Benefits of incentive compensation management
Incentive compensation may provide the following benefits to employers and employees.
Increases motivation
Through tying the compensation system to certain sales targets, employees are motivated and produce higher outcomes. When overall compensation is based on their performance, employees will have greater motivation to reach their goals.
Facilitates the alignment of interest
Incentive compensation can align the interests of employees with high-level company strategies, encouraging employees to work towards the company’s success.
Improves retention
Incentive compensation can help keep high-performing employees by providing incentives and recognition for their hard work.
Encourages accountability
Incentive compensation programs set clearly defined goals and objectives for employees. They hold them accountable for their work and reward their achievements.
Enables flexibility
Incentive compensation can be tailored to meet the individual requirements and objectives of the company in general and individual employees, allowing companies to create the best compensation plans for their particular employees.
Best practices to make effective incentive compensation plans
There’s no standard method for implementing an incentive compensation plan. There are some essential elements to ensure that you’re set to be successful.
Define an unambiguous structure
Define which teams earn incentive compensation. Consider the objectives of each team. Plan your actions around aspects that are within the team’s control. Pay particular attention to the behavior you wish to reward.
For instance, for the inside SDR group, for example, you’ll need to reward those activities that demonstrate an excellent inbound SDR performance, such as lead response times and qualified opportunities generation. If you don’t consider these aspects and only reward revenue earned through closed-won deals, and don’t encourage the inbound SDRs to fulfill their primary tasks.
Determine and consistently monitor precise performance indicators
Be sure to measure the same key metrics consistently in time. You must have reliable information on metrics such as the closed-won amount, demos, demos scheduled, and qualified leads to decide the way these particular results should be considered in your incentive programs.
Ensure fair and consistent payouts
Your company must also guarantee its employees consistent payments as promised. Failure to do so could compromise employee engagement, morale, and trust within your leadership team and decrease engagement levels.
Transparency to employees
Your employees can understand the way their performance relates to their objectives and what they’re compensated for, and the best way to read and comprehend the incentive compensation statements.
Also read: Employee Reward Ideas for Remote Development Teams
Review and alter incentive plans regularly
If your incentive program isn’t delivering as expected (or even at all), it’s time to be redesigned before doing more damage than good. We suggest reviewing your KPIs and goals at least quarterly to catch and resolve issues before they happen.
Use incentive compensation management tools
What tools and systems do you have that can assist you in managing and maintaining the manual effort that is typically required to manage your incentive plan? Ensure you know the answers to this question before you roll out your program. If you’re working with a large group or a limited bandwidth, you want to consider incentive compensation management solutions to help keep your program running efficiently.
Incentive compensation management challenges
Before the introduction of incentive compensation management tools, those responsible for incentive compensation typically used a mixture of manual and spreadsheet methods to calculate the compensation. Even though some companies still rely on the old methods, others might be relying on a disparate combination of tools that do not have the integration and data required for seamless incentive compensation management.
Yet, incentive compensation is a challenge. be difficult. Maintaining regulatory compliance requires striking an equilibrium between clarity and complexity, knowledge needed to integrate systems across an enterprise, and automation tools that help keep information moving freely. Doing this efficiently takes practice. Automation tools may make this task simpler. In the same way, if data is not synchronized and tools for reps, they could struggle with trust and transparency regarding earnings calculation. It could also be difficult to change plans in response to changing markets or priorities.
In all these instances, selecting the appropriate incentive compensation management software is crucial to cut administrative costs, increase internal alignment, and maximize revenue growth.
Leave a comment