Corporate Strategy

What is incentive pay? 4 pros and cons

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Incentive pay is a performance-based reward that is usually financial, often used to reward employees for achieving specific goals, such as exceeding sales targets. For small businesses, this kind of reward can be a great way to motivate employees.

In this article we will be answering the question ‘What is an incentive payment?’, look at the specifics of incentive pay and list four pros and four cons.

 What is an incentive payment?

Sometimes referred to as merit-based compensation, incentive pay is a financial reward employees can earn on top of their base salary. It is usually used to motivate employees to hit certain targets. This can include:

  • Cash bonus
  • Commission
  • Shares/stock options
  • Paid Time off

 What are the 5 types of incentive pay?

Now we have discussed what inventive payments are, let’s look at the types that can be rewarded to employees, and the ways in which they differ.

  1. Cash bonus

Cash bonuses are a common type of incentive pay and can vary depending on what the company is willing to offer. A few examples include an annual bonus, a signing bonus, or a one-time cash bonus.

  2. Commission

Commission-based incentive payment can be variable and is often based on specific targets that are required to be met. This could include a specific sales target or a number of newly acquired customers.

 3. Shares/stock options

Shares or stock options allows employees to purchase company stocks. This can be a popular choice as it gives your employees a stake in the success of the company, which will likely motivate them.

   4. Paid time off

While not a direct monetary incentive, paid time off can be used as gives employees the opportunity to take additional leave which can be a huge motivator. This also helps ensure a good work-life balance, especially for those who may have gone the extra mile to hit the target required.

   5. Other incentives

Other incentives such as providing employees with prepaid gift cards are often used, especially smaller companies. It is a non-monetary incentive that can offer your employees goods or services.

 Is incentive pay a bonus?

While incentive pay can encompass bonuses, not all bonuses are considered an incentive payment, as bonuses can be a broad spectrum. It is also important to note that the details and conditions surrounding incentive pay is provided to employees beforehand so they while bonuses are usually rewarded after achieving the certain target and can be entirely at the discretion of the company.

 What is the difference between merit pay and incentive pay?

There is a distinct difference between merit pay and an incentive payment: merit pay is a permanent raise which is usually offered for a strong overall performance, whereas incentive pay is a bonus given out by the company if an employee hits a specific goal or target.

Casual vs structured incentive pay

Let’s now explore the difference between casual and structured incentive pay.

Casual incentive payments:

  • Tend to be a small, informal bonus such as a gift card
  • Can be given at any time for performing well

Structured incentive payments:

  • Are usually predetermined, meaning employees are made aware of the expectations
  • Will often fall under the category of annual bonuses or commission

4 pros of incentive pay

Below are four benefits that may help you decide whether to choose this type of incentive:

   1. Motivates employees

Incentive payments will usually motivate employees to hit specific targets and meets the needs requested by your company. This may encourage them to go the extra mile in order to reap the rewards presented to them.

   2. Rewards top performers 

By utilising incentive pay, you will reward top performers, recognising the contribution they make to the company. This will likely create a culture of high achievers and can help with employee retention as those who are compensated for their hard work are more likely to stay at a company.

   3. Aligns with company goals

When a company offers an incentive payment as part of their reward program, they will align employee performance with company objectives. This is because they offer the pay based on hitting specific agreed targets.

   4. Improves productivity

This kind of incentive can motivate employees to drive increased outputs. By having a measurable link between performance and compensation, your company can create a strong drive to produce more.

 4 cons of incentive pay

While offering incentive payment can be beneficial to a company and its employees, there are some drawbacks to consider:

 1.Quantity over quality

Something to be aware of is that if the goal is to hit specific sales numbers, then employees could go out of their way to increase the number but not get the quality leads or sales that they should be targeting. 

2.  Internal competition 

While healthy competition in the workplace can be positive, the sway of receiving incentive payments could lead to internal conflict including information/contact hoarding and an uncooperative work environment.

   3. Admin challenges

Setting up an incentive payment plan can be administrative burden for HR departments, particularly if they are specific to individuals or departments. It requires designing clear goals, tracking performance, and ensuring compliance, all of which can be very time-consuming, especially with a large workforce.

   4. High-pressure environment

The pressure that may come with an incentive plan can be tricky to manage. It may lead to employees feeling overworked and worried about hitting (or not hitting) specific targets. This can ultimately result in also employee burnout and stress.

 Get incentive pay right with the help of our payroll solutions

As we have discussed within this article, setting up incentive payments within your company can be a good boost of morale for employees and create a culture of high achievers. However, it does have its drawbacks, such as admin challenges and the potential to bring in lower quality leads or sales to hit a target.

Managing any payroll system, including those with incentive pay, can be complex for small businesses. Find out how to get the most out of your our payroll process with our flexible payroll solutions.

Gareth Moss
By Gareth Moss New Business Sales Team Leader

Gareth Moss is a New Business Sales Team Leader with nearly a decade of experience in the Access PeopleHR product. Gareth specialises in serving those within the SMB market, and his passion lies in helping businesses streamline their HR operations. Before transitioning into his current role, Gareth was a HR software product trainer, making him your ‘go to’ guy for all things PeopleHR.