What Is Incentive Pay?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 08 August 2019
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Incentive pay awards employees for good performance and can encourage them to keep working at a high level. It provides compensation for performance, rather than an hourly wage or set salary based on a contractual agreement. Studies show this approach to compensation can be helpful in some settings, and may reduce overall expenses for employers in the long term by promoting efficiency and activities that lead to customer satisfaction.

Some companies take a casual approach to incentive pay. They offer employees random benefits to thank them for their work, or in response to an exceptional performance. The random nature of such incentive pay means employees never know when it might occur, which creates a motivation to work to a high standard all the time. Such compensation may also be offered around times when companies are unexpectedly busy.

For example, if a bookstore changes locations, employees could be given incentive pay after the move to thank them for helping out. Likewise, if an employee at a grocery store defuses a tense situation quickly and effectively, a pay bonus or other gift might be given. These incentives could include gift certificates, tickets to events, and other presents designed to thank employees.


More routine incentive pay is scheduled or linked to specific events. Holiday bonuses are a common example at many companies. People may expect to receive bonuses around the winter holidays, with the amount depending on the quality of their work and the amount of time they’ve spent at the company. Some firms also give out quarterly bonuses or provide presents on birthdays or upon the birth of children.

Commissions and profit-sharing offer another model. In this case, employees make more when the company does well, which encourages them to participate in operations to help the company improve. People who sell on commission need to specifically sell items themselves, which can create a competitive work culture, while profit-sharing may facilitate cooperation because everyone benefits.

Another kind of incentive pay may be offered when companies need to reduce staffing. Executives can request that employees consider voluntary severance, a bonus payment provided in exchange for resigning voluntarily to reduce the number of forced layoffs the company needs to make. As a thanks for cooperating with the company, employees who leave on their own receive a higher parting severance than those who are laid off to cut numbers to address budget problems and issues like falling demand for services.


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Post 4

I get an incentive check every year around Christmas. It is a percentage of my regular pay, so it differs from employee to employee, and we are not supposed to discuss how much we got.

When the business is booming, we get more, because we have put in overtime and the percentage will be higher. One year, business was so great that we got two bonuses. We got one check around Thanksgiving and the other just before Christmas.

For the past couple of years, the company hasn't been doing as well. They still managed to give us gift cards to the local grocery store for turkeys and hams around the holidays, though.

Post 3

@Perdido – It is frustrating to know that you will never be eligible for an incentive check. Some companies will do nice things for you that serve as incentives to work there, though, and this can make the job worthwhile.

My employers always throw wedding and baby showers for their employees. Sometimes, everyone will bring gifts, and other times, they will just take up a collection and get us a gift card. When I was getting married, they raised $200 to get me a gift card so that I could buy a new washer.

They also take employees out to lunch on their birthdays. So, they are throwing money our way, even if it isn't in the form of a check. For me, it is incentive to keep working there.

Post 2

I am a graphic designer, and I receive hourly wages. I work with several sales representatives who are salaried and receive incentive pay based on their performance.

It is a bit disheartening to hear them shouting for joy whenever they receive incentive pay, because there is nothing like that set up for the designers. We are expected to just do our work and leave. We have no motivation to do anything extra, because it would not result in more pay.

I understand that the sales reps are very important to the company, though. The amount of ads that they sell determines the company's revenue, so that is why they get rewarded for doing a good job.

Post 1

My husband works in a warehouse that serves many stores of a large chain. The company has plenty of money to dole out as incentive pay, and they have a structured system for determining how much to give to each employee.

For starters, employees can make more money by doing more than just meeting production. For every ten percentage points over production that they meet, they get a set amount of extra money per pay period.

Every quarter, every employee gets an incentive bonus based on their performance. A person who ran 110% would get more than someone who only ran 95%, because the pay is a percentage of how much the person made over the course of the quarter.

It's a nice surprise every three months to see that extra money on his paycheck. We generally forget exactly when it will be coming, so we are pleasantly shocked.

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