Using an incentive pay program to reward employees is a good way of keeping top employees with your company. It also serves as a great way to motivate them.

Recent studies show a 79% success rate when a company uses an incentive program to reach its goals.

On top of that, 39% of employees don't feel appreciated enough. And the majority (77%) say that they'd work harder if their efforts were noticed more.

In this article, we’ll be looking at what incentive pay is and how you can use it effectively in just 5 steps. We'll also look at some important factors you should consider before implementing an incentive pay system.

What Does Incentive Pay Mean?

Incentive-based pay can either be a non-monetary or monetary reward. It's given to employees for good performance rather than for the total number of hours they’ve worked.

A good example of an incentive is commission. For example, salespeople often earn a certain percentage of every sale they make. 

Employees in a marketing, HR or operations role may often have to meet certain key performance indicators (KPIs) to receive a cash bonus or other type of reward. The same generally applies to managers at all levels of the company.

The main idea is for incentive pay to be a motivational tool that improves morale and empowers employees to do their best work.

Using An Incentive Pay Rewards System

1. Understanding Your Business Goals And Methods

How you implement incentives should align well with your business strategy.

This comes down to how your company defines success and how you plan to achieve it. Having goals provides you with targets that are measurable and will help you implement the program with a proper business case.

2. Implementing Incentive Pay

What Kind Of Incentive Plan Should You Use?

It’s important that you choose the right incentive plan for your company. As previously mentioned, start by setting the goals you wish to achieve first. This will help you decide what kind of incentive pay system to create.

These goals should generally be flexible and usable for a variety of incentive programs, including long-term and annual programs. 

Not only are goals a good way of motivating employees to achieve the company’s desired results, they’re also useful for evaluation. By comparing the goal to the result you can easily determine whether the goal was achieved.

Importantly, when employees understand the goals and check their own progress, they’ll know whether they are eligible for incentives.

Here are a few examples of common incentive pay plans:

Discretionary Bonus 

With this plan, the management team determines the size of an incentive bonus pool. Management decides the rewards different employees will receive and when. Bonuses aren't usually calculated using a specific formula.

Profit-Sharing 

Employees share in company profits according to a formula. With this plan, the total profits gathered are distributed. At times, this plan can be subject to managers’ discretion.

Team Incentives 

This program focuses on how well a smaller team performs. What’s being measured is the result of collective effort. 

Managers also generally monitor individual efforts to decide on fair incentives to award. One of the best ways to motivate your team is by sending them awesome rewards.

Annual Incentive Plan 

Rewards are tied to specific goals and the expected results are determined at the start of the performance cycle. Rewards are not always discretionary, but some aspects of them can be.

Short-term incentives are great for most employees in an annual incentive plan. There can be long-term incentives as well, but are best suited to executive employees.

Long-term incentives include stock options. These can be offered by companies with public or private stocks and bonds. A few companies offer these incentives to general employees.

Related: Examples Of Incentive Pay To Motivate Your Employees

What Should the Incentive Pay Criteria Be?

Depending on the incentive plan, only certain people are going to be a part of it. The criteria measure the employee’s performance to determine if they qualify or not. Crystal clear criteria will guarantee that the right people are awarded the right incentive.

Note that it shouldn’t be too easy to achieve the criteria. It should be enough to be challenging but achievable at the same time.

If it’s too easy, the company could lose money rather than yielding an increase in performance. If it’s impossible to achieve, employees will give up.

Be sure to check that the rewards system has a good chance of success and will not cause cash flow problems or unhealthy competition among staff members.

3. Introducing The Plan

After deciding on the best incentive pay system, it’s time to present it to your staff. Incentive pay can be a major change to bring into the workplace. It’s best to be cautious when introducing it. 

Make sure the system is clear to all individuals and share a detailed policy document with everyone for future reference.

The incentive pay policy document must state how staff members can qualify for a reward, what the rewards are exactly, how they will be measured, and the timelines for meeting the requirements.

4. Monitoring Performance

Monitor the results over time to determine if employees are reaching targets and the rewards are suitable. 

When it comes to performance metrics, you simply need to figure out an accurate way to collect sales and performance data.

The main metrics generally used for sales teams are lead generation, retention, and conversion. You will also want to monitor overall profit and return on investment on a quarterly basis.

For project management, each stage is tracked and measured against specific short-term goals. At the end of the project, how well the final goals were attained are then measured. 

Individual employee performance is monitored for work quality, quantity, efficiency and overall productivity. Marketing teams are often measured with the customer conversion rate metric.

If you are running a manufacturing firm, you will want to keep an eye on production volumes and costs, on-time deliveries, downtime, and overall operations effectiveness.

When it comes to customer service teams, the best way to measure their success is with post-service questionnaires that customers fill in. This will tell you how well an individual customer service agent is performing in their role.

To monitor performance accurately, you can work closely with line managers to track key performance indicators (KPIs). This will make reports on productivity and the incentive plan’s effectiveness more accurate.

Be sure to monitor and share the progress with the employees. This will maintain a steady level of motivation that’ll help an employee stay committed to the goal.  

5. Adapting the Incentive Pay System

There will be adjustments, or maybe a complete revision of the incentive system over time. The company's goals, customer demands, and economic situation often change. So, incentive plans need tweaking to ensure they remain effective.

Conclusion

Implementing a suitable reward system has many benefits for both the company and its employees. 

From the information we’ve shared here, it’s also clear that different rewards are ideal for achieving certain goals or benchmarks. 

There is a lot more to it, and so much to learn, too. Check out our article on the differences between merit pay and incentive pay.