Getting incentive compensation right is crucial for boosting sales productivity, retaining top performers, and powering growth. However, the one-size-fits all plans of the past struggle to engage today's workforce.
Outdated "carrot and stick" models are giving way to multifaceted compensation strategies that integrate financial rewards with intrinsic and social motivators. Meanwhile, the latest technologies now let finance leaders continuously optimize incentives based on data and insights.
This blog shares the top 8 most effective incentive compensation strategies for sales and finance teams to build into their pay plans in 2024. These techniques strike a balance between rewarding individual accomplishments and furthering organization-wide goals.
Thoughtfully designed incentives can align sales teams to financial aims, customer needs, and corporate values simultaneously. By incentivizing the right behaviors, CFOs can positively influence culture, motivate people, and drive sustainable success.
Here are 8 different types of incentive compensation strategies to use in 2024:
Gainsharing plans are financial incentives offered to employees based on improvements in their individual performance that lead to overall business gains. These are often paid monthly and can be targeted to specific business goals like increased revenues or lower churn rates.
For example: A SaaS company instituted a gainsharing program to improve customer retention. Their employees earn monthly bonuses based on the company's churn rate declining. If overall churn drops from 5% to 4%, the bonus pool would be distributed based on individual contributions towards improving renewals.
Financial incentives tied directly to specific performance indicators like churn can help focus employees' efforts. And because gainsharing rewards are paid frequently (often monthly), they enable managers to monitor progress and adjust programs accordingly.
Under profit-sharing incentives, employees receive bonus payments based on the company's overall profitability, usually paid annually. The total bonus amount is divided among recipients based on a formula.
For example: A SaaS company that pays out 5% of its $2M in net profits as an annual bonus to employees. The $100,000 total could be allocated based 50% on seniority and 50% distributed evenly amongst staff.
Tying employee earnings to the company's profitability promotes a "we're all in this together" culture and drives cross-department collaboration.
Spot awards are small financial or non-monetary rewards given to recognize exceptional short-term individual performance. Value is typically 0.25-1% of total payroll. Some examples of these forms of incentives are gift cards, trophies, meals, etc.
For example: A SaaS company that gives spot bonuses in the form of gift cards or extra PTO to reps who go above and beyond on calls or deliver an impressive sales presentation.
Spot awards incentivize standout contributions that may be difficult to quantify but deserve recognition. Because they are paid quickly soon after the achievement, they reinforce the desired behavior.
Annual incentives are one-time lump sum payments made on top of normal compensation based on annual individual or company performance. These can be a fixed percentage of base salary or tiered based on performance levels.
For example: A SaaS company that pays annual bonuses ranging from 5-15% to employees based on exceeding predetermined sales targets and revenue growth benchmarks.
Annual incentive payouts enable companies to reward achievement of longer-term goals. Establishing tiers and capping maximum earnings allows firms to maintain sound finances.
SPIFFs are short term rewards to generate immediate sales results, often targeted to a specific goal like launching a new product. The downside to SPIFFs is their potential to encourage aggressive sales tactics.
For example: A SaaS company that offers a $10,000 cash SPIFF if the sales team hits a goal of 400 new software subscriptions in Q4 to meet its 1,500 subscription target for the year.
SPIFFs provide large payout potential for achieving urgent revenue milestones. However, they risk over-focusing on short-term results vs long-term customer success.
🔔 For more on SPIFFs, see our elaborate guide "What is SPIFF in sales: A Comprehensive Guide for 2024"
Under Referral Bonuses, employees receive a bonus when they refer a new customer or employee who gets hired. This leverages employee networks to reduce acquisition costs.
For example: A SaaS company provides a $1,000 bonus to sales reps who refer a new customer that closes a deal over $5,000 in value. A $500 bonus is paid if the referral gets hired.
Referral bonuses incentivize leveraging employee connections and networks to grow sales and recruit talent. This can lower acquisition costs for high quality leads and candidates.
Team bonuses are financial rewards directed at entire teams, departments, business units or divisions for collaborative achievements. These incentives promote cooperation between individuals in the team.
For example: A SaaS company that provides an additional 10% quarterly bonus to business units that meet defined customer satisfaction or renewal rate targets.
Team bonuses build esprit de corps and shared purpose between individuals. They motivate employees to prioritize department-wide key performance indicators (KPIs).
🔔 Learn best practices for optimizing SaaS sales compensation in our guide "Optimizing SaaS Sales Compensation: A CFO's Guide"
While the incentive compensation strategies may vary, the most successful plans that motivate employees and align behaviors with business goals share several key characteristics:
Ensuring incentive plans reflect these characteristics will maximize the motivational value and performance impact of compensation strategies.
The key is then continuously refining programs based on data and insights to optimize alignment with ever-evolving business needs.
Beyond selecting the right mix of incentive compensation strategies, organizations should follow key principles to optimize their plans:
Incentive programs must connect to overall corporate objectives and growth priorities. Otherwise reps chase metrics that diverge from business success. Outline targets driving strategic aims. For example, tie sales incentives to customer retention or account expansion goals rather than pure new business volume.
Minimize distraction of broad SPIFFs by tightly defining duration, products, services, and customer profiles eligible for short-term incentives. Ensure SPIF objectives align with annual targets. Tailor SPIF eligibility to avoid conflict with ongoing core compensation.
Stair-step bonus multipliers through tiers for substantially overperforming quota. Mitigate excessive payout risks with threshold-based decelerators reducing commissions below goals. Balance risk by capping maximum payouts at rational levels despite unlimited accelerators.
Counterbalance heavy transactional earnings with morale-building recognition through spot bonuses (gift cards, events, public praise). Allows for diverse motivators beyond cash, satisfying employee preference diversity. Spot awards also enable social reinforcement and encouragement of team behaviors.
🔔 Learn how to minimize the invisible costs of sales commissions in our blog "The Invisible Costs - Sales Commission Overpayments & Clawbacks"
Successfully managing an incentive compensation plan requires active governance and continuously optimizing based on insights. Key activities include:
🔔 Learn how to optimize reporting for sales commissions under ASC 606 in our article "A Practical Guide to ASC 606 Sales Commissions (+ Sample Reports)”
Sales compensation software like Visdum centrally administer incentive calculations, reporting, modeling scenarios, and plan management to increase program speed, accuracy and visibility. Major capabilities delivered include:
Talk to a sales compensation expert today.
Incentive compensation delivers a proven means to motivate human performance. But thoughtfully balancing short and long-term strategies tailored to each sales role is fundamental to driving sustainable growth.
Complimenting financial incentives with regular recognition addressing intrinsic needs also allows for diverse motivational inputs.
While designing the optimal incentive compensation portfolio requires judgment, insights from compensation software enable continuously refining programs towards ever-greater organizational achievement.
Ultimately by strategically inspiring both individual excellence and collective mission, companies can enable human potential and mutually beneficial success.
Incentive compensation refers to variable pay that is linked to employee or company performance. It is designed to motivate and reward employees for achieving specific goals or metrics. Common forms include commissions, bonuses, profit sharing, and performance units.
CTC stands for cost-to-company. Incentive compensation in CTC refers to performance-based pay that is included in an employee's total CTC or overall salary package. It is over and above the employee's fixed pay and tied to their ability to meet predefined targets.
No, incentive and salary are not the same. Salary refers to the fixed component of pay that an employee receives, usually expressed in an annual amount. Incentives are variable components over and above salary that change based on individual or company performance factors.
Yes, generally incentive compensation refers to bonus payments made for meeting performance metrics. Bonuses are a form of extra compensation used to reward employee contributions above their regular job duties or expected performance levels. Other types of incentives include sales commissions, profit sharing, and equity programs.