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What is Incentive Compensation?

Discover tips, best practices, and everything you need to know about incentive compensation. 

7 min read

Incentive compensation is the additional pay sales reps earn on top of their regular, base salary. An incentive compensation plan (or incentive pay plan) outlines the commission a sales rep receives when they close various sales deals.

Sales incentive compensation can vary, but normally, sales reps are paid incentive compensation, and/or bonuses, when they close a sales deal. As a result, incentive compensation management is the process of overseeing the calculation and payout of variable pay and making adjustments to improve sales motivation and performance.

Benefits of Variable Incentive Compensation

Variable pay compensation is an incentive to increase performance, because employees know that if they don’t reach their quota or complete their goals, they will not receive the additional income. Getting their full paycheck is contingent upon certain behaviors, which are well within their control.

In fact, setting up sales commission structures strategically can motivate sales reps to achieve and exceed their quotas (which is a win-win for everyone). Ultimately, your incentive compensation should follow the ABCs of compensation planning—be Aligned with sales roles, Based on company culture, and Cultivated to drive the right sales behaviors. 

This is why, when designed effectively, incentive compensation is so successful. Employees know that if they reach a certain goal, they will be paid accordingly. Paying sales people quarterly bonuses dramatically improves on both the motivation of reps and the company’s ability to reach all of its goals. 

Driving the Right Sales Behaviors

Incentive compensation can be used to drive any sales behavior that you want, so it is imperative for you to ensure that you program is designed to incentivize the right behavior. For example, if you want your reps to sell an equal amount of all three of your products, then you need to design your plan so that it does not make it two times as lucrative to sell one product over another.

Your incentive compensation plan is a message that you send to your reps, and that message can either drive your sales team to do exactly what you want them to, or it can steer them far off course if the incentive plans you put forth send the wrong messages. Take a look at a few sales incentive ideas for better plan design, and incentive pay plan examples here.

The Typical Incentive Compensation Process

While the concept of incentive compensation isn’t very difficult to wrap your head around, the actual process can be a lot more challenging to digest. The plans that are designed for Sales reps can be extremely complicated, often including numerous metrics and rules that denote the amount of money reps can earn and how they are going to make it. 

Aside from the tedious aspects of the process mentioned above, there are other challenges for the person responsible for handling the sales incentive compensation program at any given company. Surprisingly, 87% of organizations are still calculating compensation in spreadsheets or with homegrown systems—even though 80% of spreadsheets contain errors!

While this may have worked when the company had ten reps, it is not a sustainable solution for growth oriented companies, and it leaves these firms vulnerable to errors and lack of visibility. Both of these issues can have dire financial repercussions, which is why having an automated incentive compensation solution is so critical to any business. Learn more about the impacts of compensation errors (from spreadsheets) in this infographic.

Incentive Compensation Automation and Simplification

Incentive compensation is the heart of your sales organization's success. Therefore, it's extremely important that the planning, execution, and analysis of this plan runs smoothly. Automation of these processes ensures accurate data, correct calculations, and timely payouts.

Xactly helps companies streamline and simplify their existing incentive compensation processes, allowing you to motivate your sales teams more strategically. It allows you to maximize the investment in an incentive compensation program, while also achieving greater performance from your sales team.

However, Xactly Incent isn’t just a calculation engine—it’s a complete platform that revamps your sales department and your incentive compensation program, so that you can both calculate comp more easily and meet and exceed company goals. Earlier in this article I described how sales plans could quickly become cumbersome when too many metrics were involved. Xactly allows you to manage even the most complex calculations and formulas with ease and flexibility.

The reporting tools and dashboards Xactly Insights customers have access to provide real-time visibility to both leadership roles and sales reps, allowing them to monitor patterns and opportunities to follow sales incentive guidelines. Leaders can also identify and flag reps at risk for turnover and take action to prevent it. 

Going Beyond Incentive Compensation

A strong incentive compensation plan is key, but there's more to a strong sales organization than just incentive pay. Strong and successful sales organizations need an integrated, data-driven sales plan. Using data as the driver behind sales planning, organizations can plan more effectively, analyze performance continuously, identify problems before they hurt performance, and improve plans proactively.

Learn more about the benefits of a automated data-driven sales performance management platform in our white paper with Hobson ROI, "Driving ROI: The Business Case for a Comprehensive Sales Performance Management (SPM) Solution."