What is Incentive Compensation?

Ryan Barone
Ryan Barone
In Incentive Compensation
Ryan Barone is the SEO/Growth Marketing Manager at Xactly. He earned his MBA from Santa Clara University after receiving a degree in Marketing from Arizona State.

Incentive compensation is the supplementary money an employee makes for a certain level of performance on top of their regular, base salary. The incentive compensation plan (or incentive pay plan) is a statement outlining the commission a sales rep receives when they sell a certain amount of a given product. This is the norm, as salespeople are often paid incentive compensation, and/or bonuses, when they close a sales deal. Incentive compensation management, then, is overseeing this piece of variable pay and making adjustments to improve sales motivation and performance.

Many of you are likely already familiar with the concept of incentive compensation, but you may not yet realize just how familiar. You don’t know it because you’ve heard it referred to by other names, or you may not have had time to explore it in its full potential yet.

Benefits of Variable Pay

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. This is why incentive compensation is so effective; because 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.

Download our guide, "Designing Sales Compensation Plans," to learn how to use incentive comp to inspire your teams to perform above and beyond the competition.

Driving the Right Behavior

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 product A rather than product B. 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 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. Luckily, we’re here to help; the plans that are designed for Sales reps can be extremely complicated, often including handfuls of metrics and rules that denote the amount of money they are going to make and how they are going to make it. If you try to imagine having a team of a hundred or more reps to pay, you might suddenly understand why the sales compensation expert at your company is tired and overworked.

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. 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.

Automation and Simplification

Now that you’re in the know about incentive compensation, it’s likely becoming clearer why a company would want to use software to calculate its commissions rather than depending on error-prone manual processes. 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.

Xactly 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 customers have access to provide real-time visibility to both leadership roles and sales reps, allowing them to identify patterns and opportunities to follow sales incentive guidelines.

Now that you know more about incentive compensation, and the powerful impact it can have on your sales team, don’t hesitate to learn more about what Xactly’s sales incentive compensation process.


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What is Incentive Compensation?