Remuneration consists of a so-called fixed component, which consists of a base salary, and a so-called variable component, which is distributed based on performance. What is the purpose of incentive compensation? a high-valued individual.
By definition, incentive compensation distinguishes between employees based on their performance. If an employee falls short of their expected performance, no incentive compensation should be given, but the maximum bonus should be given for performance that meets or exceeds targets. Why should incentive compensation prioritize fairness in the recognition of individual performance over recipient equality? In this article, we will consider the essence of incentive compensation: rewarding employees in the most equitable way possible in order to increase performance.
Incentive compensation generates pay differentials. While some employees will meet or even exceed their goals, others will fall short. As such, the aim should not be to make incentive compensation equal, but rather to make it fair.
For example, some social partners may have an egalitarian view of remuneration: according to some claims, employees should receive the same amount, and this should, for example, be increased in the same way for everyone. However, according to a fair vision of incentive compensation, the person who works the most and best should be able to earn more than the person who has not performed as well, if at all.
When developing an incentive compensation scheme, two key factors must be considered:
1 – The incentive management software system established at the outset should be able to be justified. The incentive compensation system put in place must therefore be fair from the get-go, and each employee must have the same chance to perform. Employees should be given the same amount of information and Performing opportunities.
2 – All employees must be clearly informed of their responsibilities in terms of targets and performance, and the incentive compensation system must be fully measurable. This means that the goals must meet “SMART” criteria and be:
- Specific: the objectives must be precise and concrete.
- Measurable: the targets must be able to be measured.
- Realistic: the targets must account for external or internal constraints as well as the company’s resources.
- Time-bound: a deadline should be established to keep employees alert until the deadline arrives and to encourage greater commitment.
In light of these two fundamental principles, incentive compensation will inherently create inequalities – first, between those who receive incentive compensation and those who do not, and second, between top performers and those with less impressive results. It is also worthwhile to consider the following question: what is the difference between an employee with incentive compensation?
All positions are eligible for incentive pay.
Although incentive compensation was designed to reward employees whose jobs had a direct impact on turnover, such as salespeople, employers have realized that the variable component is a motivating lever at all hierarchical levels and for all functions, particularly support roles, which influence many of a company’s performance indicators indirectly.
Consider delivery drivers: incentive compensation based on order delivery speed and quality can be quite relevant. Because the orders have already been paid for, deliveries have no direct impact on a company’s turnover; however, the performance of the delivery drivers has a positive impact on customer satisfaction and encourages customer loyalty. As a result, a method for fairly rewarding individual performance must be developed in order to continue to generate commitment and maintain high levels of customer satisfaction.
In order to increase sales and generate more revenue in a competitive market, you must track and manage the performance of your sales team effectively and efficiently. Your sales team will be more motivated, productive, and perform better as a result.
This process, however, can be complicated, especially if your sales strategy involves a large number of reps and sales teams. Elevate HQ can help with this and answer your questions like What does OTE mean? It assists you in streamlining the performance management process in order to improve operational efficiency.