What is Incentive Compensation?

Aug 09, 2021
2 min read
Incentive compensation is the variable income sales reps earn based on their performance in addition to their base salary, and there are a lot of ways to go about it. Discover everything you need to know to get it right.

​In sales, motivation is key. Your reps need to be engaged and motivated to move deals through the pipeline and bring revenue home. There are several ways to inspire performance across your team, but the most important is incentive compensation.

Incentive compensation is the additional pay sales reps earn on top of their regular, base salary. Typically, this functions as a critical part of your sales compensation plan, which outlines the variable pay a sales rep is eligible to earn.

What is incentive compensation?

The Goal of Incentive Compensation: Driving the Right Sales Behaviors

To be blunt, incentive compensation is designed to tell your sales reps what to do and how they can earn more. That’s why it’s essential to align commission plan structures with your overarching goals to make sure they motivate sellers to prioritize certain deals and structure them in the right way.

For example, if you want your reps to sell all three of your products, with an emphasis on adding on a particular service offering, then you need to design your plan so that it makes it more lucrative to add on that service.

Types of Variable Incentive Compensation

There are several forms of compensation you can use to motivate your sales team. 

Types of incentive compensation

Here’s a quick breakdown of the most common types of variable incentive compensation: 

  • Sales Commission Structures: These are the most popular way to build out incentive compensation. Commission structures spell out how reps earn money. They can be as simple as a straight percentage of revenue from every deal closed (know as a “straight commission”) or more complex, taking into account the percentage of quota completion.
  • Sales Performance Incentive Fund (SPIFs): SPIFs are a highly effective short-term incentive. It’s best to use these in addition to a sales commission structure to shift seller focus over a period of time for product releases or to address increasing competition. 
  • Bonuses: Bonuses work well to motivate both sellers and non-sales employees to work towards specific initiatives. They typically are a set amount of money that will be awarded when that goal is achieved.
  • MBOs: Management by Objectives, or MBOs are a great way to incentivize a number of different roles in your organization, including non-sales employees. This operates like a bonus that a person can earn for hitting individual goals set with their manager.

Incentive Compensation Automation and Simplification

The process of managing, calculating, and paying reps their earned commissions is known as Incentive Compensation Management (ICM). But it’s more than just writing sales reps their paychecks. You need to be able to calculate seller pay and look at the effectiveness of your sales incentive plans.

The power of automated incentive compensation

Using Incentive Compensation Management solutions ensures your compensation data is accurate and in one place for everyone in the organization to access. It also simplifies the calculation and payout processes, reducing the number of errors and allowing reps to see their earned commissions in real time.

With all of your data in one place, you can improve your compensation even more by benchmarking it against industry pay insights. Comparing your compensation against your industry allows you to develop competitive incentives that attract and retain top talent. 

Retention is even more critical for today’s organizations, considering 58 percent of organizations experienced increased turnover in the past 12 months, according to the Xactly 2021 State of Global Enterprise Sales Performance survey.

Unleashing Your Incentive Compensation Performance

Your variable incentive compensation strategy plays an important role in your ability to drive revenue and achieve your goals. With the right data, tools, and strategy, you can motivate your sellers to close deals more quickly and prioritize the most profitable deals.

Discover more ways you can improve your sales incentive compensation planning and management in the “2021 Guide to Successfully Managing Sales Compensation.”

  • Incentive Compensation
Karrie Lucero
Karrie Lucero
Creative Strategist

Karrie Lucero is a Creative Strategist at Xactly Corp. She earned Journalism and Marketing degrees from New Mexico State University and has experience in the tech and SaaS industries, content strategy and creation, video production, and brand storytelling.