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What is an Incentive Compensation Plan?

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  • Written By: Larry Ray Palmer
  • Edited By: Amanda L. Wardle
  • Last Modified Date: 13 November 2016
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An incentive compensation plan is a program that offers a reward or recognition in exchange for performance. There are several varieties of these reward and recognition plans. Commonly recognized business strategies, such as customer reward programs or commission paid to employees, are examples of the incentive compensation plan in action.

Customer reward programs are a common form of incentive compensation plan. These programs are designed to influence customer behaviors or promote purchases of a certain product or service. This form of compensation plan may include cash back incentives, certain sales or promotions, or customer discounts for referring new customers. The basic goal of this strategy is to create an environment in which the customer wants to buy a product or promote a service to receive a reward. It is a common strategy among credit card companies and retailers to encourage purchasing behaviors.

In the corporate world, incentive programs are often used for employee motivation. When an employer wants to boost employee morale, they may introduce an incentive compensation program to motivate the staff. Incentives sometimes include non-monetary rewards such as employee and family events, company vacations, or other prizes. In some cases, one-time monetary rewards may also be offered. A common example is the employee of the month program used by many companies.

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The incentive compensation plan can also be used for employee retention. In businesses that experience a high staff turnover rate, management may choose to implement employee retention programs. Employees who stay with the company for a period of time may be offered incentives in the form of a raise in salary, monetary bonus, or public recognition of the individual's service and loyalty. Companies who utilize this type of incentive program often come from industries where competing companies tend to recruit experienced employees away from other companies.

Another form of incentive compensation plan is the employee incentive program. Retail companies sometimes give employees an opportunity to benefit from demonstrating sales ability by offering commissions. A commission is a monetary reward for making a sale. In addition to commission-based salary programs, some corporations also offer other incentives, such as award ceremonies, travel opportunities, or automobiles. One well-known example of a company using this kind of incentive compensation plan is Mary Kay Cosmetics. The Mary Kay cosmetic company gave each of their five top salespeople a pink Cadillac in 1969 and continue to offer incentives to employees with high levels of sales.

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candyquilt
Post 3

I'm glad I ran into this article because I have several job interviews coming up in the next couple of weeks and it hadn't occurred to me to think about the incentives these jobs might offer.

I think a cash bonus or a vacation incentive sounds pretty good and I would prefer to have a job like that. It would definitely make me more excited to go to work.

But how appropriate is it to ask about incentive compensation plans during a job interview?

SteamLouis
Post 2

I'm not too familiar with employee incentives but I do know about affiliation incentives with some companies. I am personally an affiliate of three companies that sell cosmetics and beauty products. Two of them have commission incentives, meaning that I receive a certain percentage of commission from each sale that I help make. This affiliation is not a very active one, I simply place banner ads of these companies on my website and if someone clicks on it and actually makes a purchase, I will receive a commission.

This is pretty advantageous for companies because I really don't think that many people go to an online store and immediately make a purchase. I personally don't. So the chances of

me getting a commission is pretty low but the chances of the company making a sale through me is higher.

The other affiliation I have is both a commission and gift incentive program. I receive a gift product from them every time my website reaches a certain number of followers.

I like this latter incentive program much better, because it allows me to try their products for free. I also giveaway some of these products for free to my followers, which is a great way to advertise my website. This kind of incentive is most advantageous to affiliates I think. The company is benefiting too, because that's a lot more advertisement for them than a single banner ad.

bear78
Post 1

I think the Ford company was one of the first business companies in the US that had a really nice incentive program for their employees.

Ford introduced the assembly line in manufacturing. But the working at the assembly line was difficult because the employees had to repeat the same body movements over and over for hours and suffered physically from this.

Ford knew this but it was making so much money from using an assembly line in manufacturing cars that to make up for this disadvantage, it introduced lots of incentive programs to its employees like bonuses, cars and vacations. I heard that many people wanted to work for Ford at that time just because of these incentives. The Ford Incentive Club was very prestigious.

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