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Types of Incentives in Compensation Management

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by BHG Staff

06.26.23

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Defining the types of incentives in compensation management

Understanding your options

If you want to learn about the types of sales incentives used to grow, retain and motivate your sales team, look no further. As a sales team manager or employer, a major concern for you and for many in your arena is attracting, maintaining, and cultivating high-quality talent within your sales team. Innovative and captivating compensation plans can help attract and retain these employees. By offering incentives tailored to the strengths and interests of your salespeople, you can drive performance, lower employee turnover, cultivate a positive work environment, and eventually increase your profitability. If you’d like to learn more about the different types of incentives in compensation management, how they may make a difference in your team, keep reading.

How sales incentives work

Sales incentive plans, when designed and implemented well, can provide a two pronged approach to create a high performance sales team. The sales talent market is traditionally a highly competitive space, and employers struggle to find top sales talent. Incentives that are highly lucrative and low in complexity, and therefore easy to understand, can be a powerful tool to entice and ultimately retain sales talent. In addition, a cleverly designed sales incentive plan can drive the behaviors of your sales team that are aligned to your short and long term business goals. A loyal high, performing sales team provides the foundation for your company’s continuous growth and reduces risk. But, for these programs to work, they must be implemented correctly.

Types of sales incentive programs

When it comes to incentives, there are several options for a sales leader to consider. Having an understanding of what these are, and assessing which type works best for your goals and team, is crucial. We provide a high level breakdown of some types of incentive plans and mechanics that can be used to craft an incentive strategy below:

  • Salary + Commission – Salary plus commission is popular because it is simple and reliable. Sales team members receive a base salary plus a commission for every sale. Commissions can comprise a percentage of the sale or a fixed rate; the structure varies depending on the company.
  • Draw Against Commission – This is a type of commission-only compensation plan that functions as a cash advance. At the start of each pay period, employees receive pay advances that act as base pay. At the period’s end, this amount is subtracted from the total generated commission. Under this remuneration plan, an employee may end up owing money if they fail to meet the sales quota.
  • Profit Based Compensation – Sales representatives are rewarded with a commission based on the company’s performance. Wages are directly equated to the company’s success in recognition of employees’ contributions. This reward system relies on the financial performance of the company and the work put in by employees– it can vary greatly over time. Salaries can vary with volatility from year to year, but they can be effective in motivating performance.
  • Territory Volume – This sales management approach is commonly observed in team-oriented companies. It involves aggregating the total sales within a territory at the end of each period and allocating commission payouts evenly among representatives. For instance, if five representatives are working together in a territory that achieves total sales of $50,000, each sales representative is granted a share of $10,000.
  • Capped – Sales representatives receive a base wage in addition to commission. This incentive-based program uses commission as a tool for motivation; however, it includes a limit that restricts potential earnings. Caps increase budget efficiency but may lead to a lack of motivation once it is hit. This is a tricky plan to navigate, so be sure to use your judgment wisely before incorporating this into your strategy.
  • Gated Performance – When sales figures increase, the rate of commission also increases. This kind of motivation drives stellar performance and increases sales efficiency. Our team can help you build numerous compensation tiers to further incentivize superior performance and ensure employees are appropriately compensated. Ultimately, all these efforts should serve as additional motivation and bolster employees’ capabilities.
  • Set Rate – Compensation for each sale is predetermined; each product type rewards its representative with a different earning potential. For example, for Product A, you receive a $100 commission, while Product B yields $50 per exchange. Knowing ahead of time how much will be provided for an individual transaction helps to establish dependable budgeting when selling products.

Depending on your goals, you can mix and match plans and mechanics to create a strategy to meet your unique requirements. This can get complex, so consider working with a partner that understands sales incentive strategy deeply and provide the right guidance to create an effective yet simple incentive strategy to fulfill the needs of your sales organization.

Key factors to consider when designing your incentive plans

How to achieve a successful sales incentive strategy

One key to implementing a successful incentive plan is to align it with the sales team’s goals and values without disregarding individual contributions. This approach helps to create a win-win scenario where the entire organization benefits from the sales team’s growth and success. In addition, offering unique incentives helps showcase that your team is appreciated for their hard work and creates a sense of loyalty and pride in the execution of their work.

  • When establishing an incentive plan for your sales team, it is important to consider the position’s market value and your budget, as well as what level of talent you want– more impressive talent will want more impressive benefits.
  • You must also communicate clearly with the sales team about how performance is measured, what kind of incentives are available, and the requirements for achieving them. This discussion should include clear expectations and a timeline for distributing the rewards.
  • Ensuring that all incentive designs and measurements are fair and equitable is important to maintain a positive workplace environment.
  • Finally, give careful thought to how your incentive strategy will be managed and administered. What types of tools and processes will be required to administer your incentive plans from design to payout? Having the right tools and processes to efficiently and accurately administer your incentive strategy is crucial.

Developing an effective sales incentive plan doesn’t have to be complicated; however, it does need to be solid– the results can impact sales morale and, ultimately, your company’s bottom line. By taking the time to thoughtfully consider your options, you can ensure your sales team is being incentivized with the package that will most effectively motivate them and help you reach your sales goals.

Tips and strategies for managing incentive plans

Administering your incentive strategy

Once you have developed an incentive strategy, the next step is determining management and administration. It is a critical piece for an organization to be able to operate at an optimal performance. If you cannot effectively and efficiently administer your incentive strategy, it can have a negative impact on your sales and operation team’s performance. Cumbersome and error prone processes can lead to stress for your compensation admin team. It can also lead to inaccurate payouts that reduces the trust within your sales team and increases the financial risk to your organization. Overall a poorly administered incentive strategy can reduce the morale of your organization. Working with a partner that has the expertise to recommend a holistic and tailored ICM solution has high return on investment. They can help your sales and incentives strategies be effective and successfully adopted by your employees. Adoption of effective sales incentive strategies, management, and practices contributes to increased sales revenue and reduced operating costs.

Bringing the benefits of an effective incentive strategy to your team

Blue Horizons Group is your incentive compensation management partner

It can be daunting to create and execute an effective sales incentive strategy. But you do not have to do it alone. Blue Horizons Group can be your strategic partner to guide you through each step of your Incentive compensation journey. Our knowledge runs deep, with over 200 years of combined experience. We understand the intricate complexities of designing incentive compensation plans and the systems that support their administration. Our advisory services can help develop strategy, roadmap, and plan tailored to your business needs and scale. We can provide recommendations for an ICM solution that fits your unique business need. Furthermore, we can implement and help you adopt the ICM solution of your choice to serve you incentive needs in the future.

With unrivaled levels of experience constructing optimized compensation solutions under our belt, we are here to be your go-to team for achieving long-term success. We provide sustainable, effective, and innovative incentive compensation solutions that are optimized for scale and budget.

In today’s ever-changing and competitive business world,  having the ability to motivate your team, pivot with evolving needs and run an efficient organization is crucial for success. Blue Horizons Group can help you in achieving this success. Contact one of our experts today to learn how our services can change how you make sales forever.

2024-02-06T20:17:33+00:00

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