Your guide to implementing incentive pay
When done well, incentive pay can inspire hard work, increase sales, and create healthy competition.
But what is incentive pay, and how can your organization best use it to motivate employees to make their best effort?
Let's explore how to build an incentive program that delivers real results.
Table of contents
Does incentive pay really work?
Examples of incentive pay programs
How do you design an incentive pay plan?
What is incentive pay?
Incentive pay is a type of merit-based compensation tied to achieving specific performance goals, milestones, or objectives. It provides wage flexibility and extra motivation beyond an employee’s base salary.
Companies can distribute incentives to individuals based on personal performance, teams that accomplish shared goals, or even vendors and partners to strengthen business relationships. The key to success is having clear metrics and fair distribution.
Incentive pay comes in two main forms:
Structured compensation: These incentives are established in writing and happen regularly when people meet defined goals. These include yearly bonuses, sales commissions, performance-based raises, and stock options.
Casual incentives: These one-time or occasional rewards recognize exceptional effort. A gift card for closing a big deal, extra PTO after a major product launch, or a team celebration dinner to celebrate a successful quarter can provide additional motivation.
Types of incentive payments
Companies use various types of incentives to drive performance and retention. Here are some of the most effective options and when to use them.
Cash bonuses
A cash bonus provides additional compensation beyond regular salary. It gives companies the flexibility to reward performance without committing to permanent raises.
According to Glassdoor, these are the most common types of cash-based incentives:
Annual bonuses based on company and individual goals
Spot (discretionary) bonuses for exceptional work
Signing bonuses for new hires
Holiday bonuses
Retention bonuses to encourage loyalty
Referral bonuses for recruiting
Profit-sharing distributed across teams
Several of these incentives can take forms other than cash. An organization might distribute gift cards during the holiday season, offer stock as a profit-sharing bonus, or reward employees with an extra paid day off.
Gift cards are an increasingly popular reward in incentive programs. When your budget requires smaller amounts — or when you want to reward smaller accomplishments — a $25 gift card to the coffee cart downstairs may be more effective than doling out cash.
Our own employee gifting study found that 65% of employees prefer money over other employee rewards, and 67% would be satisfied with just $50 to $100.
Commissions
Sales teams typically earn commission as a percentage of each sale. Companies might offer:
A percentage of each sale
A set amount per customer or transaction
A quarterly or annual commission based on the percentage of quota met
An amount divided among group members based on the group’s total sales performance
Some companies offer tiered commission structures as well. For example, a salesperson might make 5% in commission for the first $50,000 of sales and 7% for all sales over that quota.
Non-monetary rewards
Not all rewards are cash-based. Non-financial incentives further allow companies to personalize rewards based on individual and team preferences.
For example, your organization could offer benefits like a more flexible schedule or workplace improvements like catered lunches during busy seasons.
Working on a tight incentives budget? Encourage managers to pen personal, handwritten notes to thank employees for their hard work, or have your HR team send a company-wide email recognizing their accomplishments.
Does incentive pay really work?
Yes, when structured thoughtfully. Incentive programs work best when rewards feel attainable but not guaranteed. When bonuses become expected, they lose their motivational power.
Companies with well-designed incentive programs see 31% lower voluntary turnover rates. But your program structure matters. Research shows that equitably distributed rewards based on clear metrics drive better results than equally distributed rewards.
Benefits
A strategic incentive program:
Aligns employee and company interests
Defines what matters most to your business
Empowers people to improve processes
Rewards high achievers
Builds performance culture
Encourages skill development
Reduces costly turnover
All these factors contribute to better products, happier customers, and stronger financial results.
Potential risks
Like any HR strategy, incentive pay comes with risks that need thoughtful management.
If your program is a competition, it can lead to tension between employees. Unhealthy competition and jealousy can compromise morale, engagement, and productivity. To combat this, build programs that unite teams instead of dividing them.
Employees might neglect responsibilities that aren’t tied to incentives. In this scenario, help employees understand why their responsibilities are important and indirectly impact progress toward incentivized goals.
Incentives can encourage employees to adopt overly aggressive sales tactics or unethical practices. To avoid this, define acceptable behavior and processes tied to your incentive program.
Programs that don’t define success criteria could be susceptible to wage discrimination. For instance, if incentives are based on performance reviews, then rewards could be affected by supervisors’ personal biases and relationships.
Examples of incentive pay programs
Smart companies design incentive programs that align with their company culture and objectives. Here are two real-world examples to inspire your own employee incentive program.
Google's spot bonus program
Google takes a multifaceted approach to incentives. After discovering that massive monetary bonuses for elite performers created jealousy and resentment, the company moved away from pure cash rewards. Its spot bonus program empowers both managers and peers to recognize outstanding one-time achievements.
Managers can reward employees for exceptional project work or team contributions without waiting for annual review cycles. Employees can also recognize their peers’ exemplary work that managers might not see directly, fostering a culture of appreciation at all levels.
The company found that non-monetary rewards often motivate its team better than cash. Instead of large monetary bonuses, they offer experiences like team dinners, new tech gadgets, and even international travel.
The program emphasizes that rewards don't need to be expensive to make an impact. What matters most is consistent recognition that aligns with employee values and preferences. Rewards are designed to be personal and meaningful rather than purely transactional.
Google also uses the program to strengthen team collaboration. Executives can reward entire groups for outstanding performance, promoting both individual excellence and team success. This approach creates a culture where personal achievement and teamwork are recognized and celebrated.
Vocus Communications' wellness incentive program
When Vocus Communications scaled from 200 to 2,000 employees through a merger, it faced a benefits fragmentation problem. Some employees had gym memberships, others got health reimbursements, and most received nothing at all.
The telecom company realized that giving everyone the same benefit wouldn't work — it would be both cost-prohibitive and fail to meet diverse employee needs. It needed a solution that respected individual choices and built trust in the newly-merged organization.
Its solution was elegantly simple: give every employee a $299 annual wellness card ($1 shy of Australia's $300 tax threshold). Employees could spend this on whatever wellness meant to them, from fitness equipment to mindfulness apps.
The revolutionary part wasn't the amount, but the complete lack of bureaucracy. No approvals required, no receipts to submit. The company trusted employees to invest in their own wellbeing.
According to HR head Denise Hanlon, employees consistently make responsible choices with the freedom they're given. The program reinforces that Vocus hires "awesome people" who can be trusted to do the right thing.
The results speak for themselves. Vocus saw wellbeing scores increase from 5.4 to 6.0 in just six months. More importantly, the program strengthened its culture of trust and autonomy during a critical growth period.
How do you design an incentive pay plan?
Start by defining program objectives aligned with your work culture, employee preferences, and business goals, then follow these core principles:
Be objective: Use quantifiable metrics where possible rather than subjective reviews. Clear targets prevent misunderstandings and biases from creeping in.
Be transparent: Ensure everyone understands how to earn incentives. Transparency builds trust and prevents perceived unfairness.
Keep it simple: Avoid complex structures that confuse people. If a seventh-grader couldn't understand it, simplify your approach.
Be proactive: Replace after-the-fact bonuses with clear performance incentives. Defined rewards drive strong motivation for employees to contribute their best effort.
Stay consistent: Establish clear rules and stick to them. Changing policies frequently erodes confidence.
Monitor and adjust: Track metrics and gather feedback. Be ready to refine your program as needed.
Key takeaways
Effective incentive pay programs require careful design and consistent execution. Focus on developing clear performance metrics, choosing meaningful rewards that match employee preferences, and delivering a fair distribution based on measurable results.
Creating the right structure matters more than the size of rewards. Research shows that equitably-distributed incentives tied to specific achievements drive better results than equal distribution or massive bonuses. Build your program to reinforce company values while motivating both individual and team performance.
