Incentive Compensation: 5 things to take care of while designing Incentive Compensation Plans

Incentive compensation is a type of pay or reward that is given to employees as an incentive to motivate them to perform at a high level. This type of compensation is typically tied to specific performance metrics, such as sales targets or profitability, and is often used in sales or management positions. The goal of incentive compensation is to align the interests of the employee with those of the employer, by providing a financial reward for achieving specific performance goals. Incentive compensation can take many forms, including bonuses, commissions, and stock options. It is often used in combination with base salary or wages to provide a more comprehensive compensation package.

Incentive compensation is an important management tool for organisations to motivate and reward employees for outstanding performance. By offering an additional form of compensation, an organisation can reward hardwork and dedication, improving overall job performance and motivation. Incentive compensation can come in financial rewards, such as bonuses or stock options, and non-monetary rewards, such as awards.

It is designed to drive desired behaviors and encourage employees to strive for excellence. Companies can use incentive compensation to set standards, reward excellence, and provide motivation and recognition. By offering incentives, an organisation can ensure that employees remain engaged, motivated, and satisfied with their job and environment.

Factors to consider when creating an incentive compensation plan for your company;


Set Measurable Objectives

The first step when setting up any incentive compensation plan is to set clear, measurable objectives that the company can use to measure employee performance.

● What do you hope to achieve with this project?

What motivates your employees?

● Who will be receiving the awards?

All of these should be considered when setting up the structure and parameters of the plan. This will ensure that you reward behavior that benefits the company and clarify what they need to do to earn the incentives.

Track Performance

To measure the performance of each employee against the set objectives, you need to be able to track the progress made. You must have adequate systems to evaluate and record employee performance, such as feedback forms, surveys, etc. A comprehensive tracking system also allows you to provide immediate feedback to employees, which can be highly motivating.

Read Also: Building a  High-Performing Team Through Employee Performance Management

Reward the Right Behavior

Knowing exactly what behavior you want to reward is crucial. Ensure you reward behaviors that benefit the company, not just behaviors that make an employee look good. This can include meeting targets, adhering to operational standards, or exceeding customer service expectations.

Read Also: Understanding  Deferred Compensation - A Guide to Long-Term Employee Rewards

Communicate the Plan

Effective communication is vital when it comes to incentive compensation plans. Each employee must receive a thorough explanation of the plan for them to understand how the company will reward them and what they must do to achieve incentives. Creating and communicating the objectives helps foster a sense of purpose among employees and encourages them to work toward tangible goals that can result in real rewards

Monitor and Adjust the Plan

Just remember that what works for one employee cannot work for another. So it is essential to monitor the performance of each employee and adjust the incentive plan accordingly. This will help to ensure that the project stays relevant and that employees are motivated by the rewards they receive. Additionally, it is essential to review the plan periodically to ensure it is still aligned with your company’s goals.


Incentive compensation plans are essential to any business plan, as they reward and motivate employees to achieve success. However, designing and implementing an effective incentive compensation plan takes careful thought and planning. By considering the pointers mentioned above, businesses can ensure that their incentive compensation plan is effective and efficient and that employees are adequately motivated to succeed.

Find out how Compport can help you manage all your Incentive Compensation process, book a demo today!

Frequently Asked Questions(FAQs)

1. What is incentive compensation, and why is it important for organizations?

Incentive compensation is a management tool that rewards and motivates employees for outstanding performance. It's important because it helps improve job performance and motivation by offering financial and non-monetary rewards, driving desired behaviors, and recognizing excellence.

2. How can I create clear and measurable objectives for an incentive compensation plan?

To set clear objectives, consider what you want to achieve, what motivates your employees, and who will be eligible for rewards. These factors help structure the plan and ensure it rewards behaviors benefiting the company.

3. What tools and methods can I use to track employee performance for an incentive compensation plan?

Effective tracking may involve feedback forms, surveys, and performance evaluation systems. It's essential for providing timely feedback to employees and assessing their progress toward meeting objectives.

4. How do I ensure that I'm rewarding the right behaviors with my incentive compensation plan?

Focus on behaviors that benefit the company, such as meeting targets, adhering to operational standards, or exceeding customer service expectations. Ensure that the rewards align with these desired behaviors.

5. What are some best practices for communicating and managing an incentive compensation plan effectively?

Effective communication is crucial. Provide employees with a clear explanation of the plan, how rewards work, and what they need to do to earn incentives. Regularly monitor and adjust the plan to ensure it remains relevant and aligned with company goals.

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