Incentive Compensation: Types, Examples & Best Practices

What Is Incentive Compensation?

Incentive compensation (IC) is pay for results, not just responsibilities. It can be monetary — like commissions and bonuses, or non‑monetary, like recognition or extra time off. The goal is alignment: connect company objectives to day‑to‑day actions.

Incentive Compensation vs. Base Pay

Base pay compensates for role and responsibilities (fixed). IC fluctuates with measurable outcomes (variable). Mix both to balance stability and motivation; see On‑Target Earnings (OTE) for how base + variable work together.

When you’re ready to turn that mix into a concrete program, use our employee incentive plan guide as a step-by-step framework.

Types of Incentive Compensation

There’s no one-size-fits-all model. The right incentive plan depends on your goals, team, and culture.

Here are the most common types:

If you’re looking for concrete ideas to bring these models to life, check out our article on employee incentive ideas to boost productivity.

Commission-Based Incentives

Employees earn a percentage of sales revenue or profit.

Best for: Sales roles focused on growth and revenue generation.

💡 Learn more → Sales Commission Guide →

To understand how commission design affects outcomes, read The impact of commission-based pay on sales performance.

Bonus Programs

Lump-sum payments for hitting targets or achieving company-wide goals.

For more real-world examples and structures, see our breakdown of types of bonus pay for different roles and situations.

Best for: Rewarding collective performance or annual milestones.

💡 Explore → Bonus Types & Best Practices →

SPIF/SPIFF (Sales Performance Incentive Funds)

Short-term contests that reward specific behaviors or achievements.

Best for: Driving focus during new launches or quarter-end pushes.

💡 See examples → SPIF Guide →

Team-Based Incentives

Rewards shared among groups that meet collective goals.

Best for: Encouraging collaboration and accountability.

KPI-Based Incentives

Rewards tied to measurable performance indicators, such as quota attainment, customer retention, or quality metrics.

Best for: Cross-functional roles where performance is multi-dimensional.

💡 See examples → KPI & Metrics Guide →

Non-Monetary Incentives

Recognition, career development opportunities, or additional time off.

Best for: Reinforcing culture and intrinsic motivation.

💡 Learn how to balance monetary and non-monetary rewards → Work Motivation Guide →

Related term: OTE (On‑Target Earnings) clarifies base + variable at 100% achievement →

How to Design an Incentive Compensation Plan (5 Steps)

Creating a great plan takes more than picking numbers — it’s about defining purpose, aligning incentives with strategy, and communicating clearly.

Step 1 - Define Objectives

What behavior do you want to drive? Sales growth? Retention? Quality improvement?

Clear objectives are the foundation of effective incentives.

Step 2 - Identify Metrics and KPIs

Choose measurable outcomes that reflect success. Use controllable KPIs with clear crediting rules.

Keep metrics within the employee’s control.

For concrete examples of what to track, see our guide to performance metrics for incentive compensation.

💡 Get inspiration → KPIs & Metrics Guide →

Step 3 - Choose the Structure

Decide on payout type (bonus, commission, tiered) and frequency.

Balance short-term and long-term rewards to avoid burnout.

💡 Compare plan models → Sales Commission Structure Guide →

Step 4 - Communicate Clearly

Transparency builds trust. Communicate clearly eligibility, formulas, caps/floors, and payout timing, in writing.

Make sure employees understand how performance is measured and how payouts are calculated.

Step 5 - Review and Adjust

Quarterly check-ins; update for new products, segments, or roles.

Use data to identify what works, what doesn’t, and where motivation may be fading.

💡 Learn how to refine plans → On-Target Earnings Guide →

Implementation checklist

• Role profiles and eligibility documented

• KPIs, quotas, and crediting rules approved

• Formula(s) and examples reviewed by Finance

• Dispute process and approval flow defined (see our guide on using a compensation policy to reduce pay disputes)
  

• Payout schedule, caps, and clawbacks (if any) stated

• Analytics dashboards assigned (manager + rep)

To avoid common pitfalls in plan design and rollout, review our article on common mistakes in incentive-based compensation and how to avoid them.

Incentive Compensation Strategy

An effective incentive compensation strategy balances employee needs with business objectives, fostering motivation, engagement, and retention. By developing a clear policy, setting fair and motivating incentives, and leveraging technology like Bentega incentive compensation management software, companies can create a competitive edge in today’s workforce.

A strong incentive compensation strategy includes developing an overall compensation policy which serves as a framework that outlines how employees are paid, rewarded, and incentivized within a company. The compensation policy is a strategic document that governs everything from salary structure to bonuses, commissions, and other benefits. The policy work as a supporting document for the company's compensation plan or compensation plans.

Governance: Eligibility, Crediting & Approvals (Risk & Fairness)

Clear governance prevents disputes and bias: define eligibility by role/start date and document prorating; standardize crediting on multi‑touch deals (primary, overlay, assist); set approvals for exceptions, splits, and clawbacks; keep an audit trail - no mid‑cycle surprises.

When designing the Incentive Compensation Strategy, it is advised that all rules and exemptions are clearly stated in a company wide compensation policy and individual compensation plan.

If you need help defining eligibility, crediting, and approval rules, our compensation consulting services can help you design a compliant, scalable plan.

What is a Compensation Plan?

A compensation plan is a detailed blueprint that outlines how an organization will allocate its financial resources to compensate employees for their work. It encompasses various components such as base salary, bonuses, stock options, and other financial rewards, tailored to align with the company's strategic goals and employee performance.

By clearly defining the criteria for earning different types of compensation, a well-structured plan ensures transparency and fairness, motivating employees to achieve their best. It serves as a practical guide for both management and staff, helping to manage expectations and drive organizational success through well-aligned incentives. For a step-by-step framework, read our compensation plan design guide.

Ready to optimize your compensation strategy? Explore Bentega.io for comprehensive tools to streamline and enhance your compensation management today.

Benefits of Incentive Compensation

• Boosts employee motivation – Encourages high performance.

• Aligns employee efforts with business goals – Helps drive revenue and profitability.

• Attracts and retains top talent – Competitive incentive plans improve employee retention.

• Encourages a performance-driven culture – Employees are more engaged and accountable.

For more ways to turn incentives into day-to-day motivation, see our overview of team motivation techniques.

Common Mistakes to Avoid

• Overcomplicated formulas that few can explain

• Incentives that drive volume over value (ignore margin/NRR)

• Metrics outside the employee’s control

• Infrequent communication or opaque adjustments

• Spreadsheets without version control or audit logs

• Changing targets mid‑cycle without clear policy

See also: common pitfalls in our sales commission and SPIF guides.

Choosing the Right Incentive Compensation Plan

When designing an incentive plan, consider:

• Industry standards and benchmarks

• Company objectives

• Employee expectations

• Scalability of the plan

Frequently Asked Questions