What is Incentive Pay? Explaining How to Unlock Employee Potential

Employee motivation is a key factor in the success of any organization. When employees are motivated, they are more productive, engaged, and committed to their work. In turn, this motivation can increase performance towards organizational goals. One effective way to motivate employees is through incentive pay.

What is incentive pay?

Employers use incentive pay to encourage employees to exceed goals and expectations. It is additional compensation for performance, not based on hours worked. Organizations typically tie these incentives to individual, team, or organizational goals. Incentive pay programs enhance productivity while creating a high-performance culture. When employees know their efforts will be rewarded, they are more likely to go above and beyond in their work.

Incentive pay can also attract and retain top talent. Performance-based compensation structures often draw results-oriented prospective employees. Offering a competitive compensation package is crucial for attracting and retaining skilled employees

Types of incentive pay programs

Casual vs structured incentives:

Casual incentives are given at any time for outstanding performance. They are not tied to specific goals or dates. Example: If a salesperson closes a huge deal, they may be given an incentive at that moment.

Structured incentives are provided according to specific targets or timelines. Employees can only receive structured incentives if they have met their target within the time provided. Example: A marketing team reaches its quarterly SQL goal and receives an incentive at the end of the quarter.

Monetary incentives:

Cash incentives

Cash incentives are one of the most flexible options available. Organizations can use these incentives for any team or goal since they’re not tied to contract values or profits. These incentives can be the same amount for all employees, a percentage of salary, or based on seniority. One thing to note when using cash incentives is that employees tend to use cash for forgettable things like bills or gas, so they may not be the most memorable option.


Commonly used for sales teams, commissions are typically based on the amount a customer spends with the company. Employees receive a percentage of the value of a contract or customer. These incentives
motivate sales team members to sell to larger customers and close as many deals as possible.

Profit-sharing incentives

One of the most common forms of incentive pay is profit-sharing. This type of pay ties a portion of an employee's compensation to the company's profits. When the organization performs well, employees receive a bonus or a percentage of the profits. Tying employee incentives to organizational profit motivates employees to work towards the company's success. When employees know their efforts directly impact the company's profits, they are more likely to take ownership of their work and strive to reach their goals

Non-monetary incentives:

Company stock options

Many public companies use stock options as incentives. Stocks grow as the company grows, creating a sense of ownership and accountability for its success.

Predetermined gifts

Branded items, company cars, and prepaid vacations can all drive goal completion. Although these can be desirable for some employees, not all employees may desire them. It’s important to consider what specific team members are interested in when it comes to incentives.

Gift cards

Incentive options that allow employees to get what they want are perfect for motivating them. Gift cards, or gift card catalogs, are a great way to incentivize team members while encouraging them to treat themselves. With an option like Reward Link, employers can take it one step further by allowing employees to choose their favorite gift card.

Implementing an incentive pay program

If you are considering implementing incentive pay in your organization, here are some best practices to remember.

Set clear and measurable goals

Employees must have clear and measurable goals to work towards for incentive pay to be effective. These goals should be aligned with the organization's objectives and revenue targets. The SMART system can help ensure that goals are specific, measurable, achievable, realistic, and time-limited. When employees know what is expected of them, they are more likely to focus on achieving those goals.

Communicate effectively

Communication is vital when it comes to implementing incentive pay. Employees should be aware of the goals they are working towards and how managers will evaluate their performance. It’s also essential to communicate the value and type of incentives and the payout timeline.

Use a fair and transparent evaluation process

Although each employee’s objectives and KPIs may differ, the evaluation process should remain consistent for all team members. If the evaluation process for the customer success
team includes an employee self-evaluation, all teams should include employee self-evaluations as part of their process. If the marketing team allows goals to be partially completed, all teams should allow that within their evaluations. Whatever the process is, leaders should clearly communicate it to all employees and it should remain the same for all teams.

Incentive pay FAQ

What is considered incentive pay?

Incentive pay is any cash or non-cash incentive of monetary value that is given to employees for outstanding performance.

How is incentive pay calculated?

It can be a percentage of an employee’s salary, the company’s profit, or the value of a contract. It can also be an amount the company sets based on a team member’s role or seniority.

Are companies required to offer incentive pay?

No. Companies are not required to provide incentive pay, but it can help them reach their goals.

Why do companies offer incentive pay?

Many companies offer incentives to increase employee motivation and productivity, encourage goal completion, or meet revenue targets.

What incentives work well?

Flexible non-cash incentives, like gift cards, have been proven to be more memorable than cash. People tend to use cash for forgettable things like bills but use non-cash rewards for themselves.

Whether you want to motivate employees, increase productivity, grow revenue, or meet company objectives, incentive pay can help you do it. Flexible, non-cash incentives, like Reward Link, can make your incentive programs even more effective by offering your recipients a choice of 100+ gift cards, prepaid cards, and charitable donations. Skip the guesswork and let your employees choose exactly what they want.

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