The Most Popular Incentive Compensation Programs Ranked And Explained

By Published On: February 20, 2020
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Incentive compensation programs originated from the idea that rewards motivate and drive behavior, proactively productive behavior. Most commonly known and applied to the corporate setting, incentive compensation programs are capable of catering to a spectrum of industries as well as different levels of employment. It’s a universally accepted and expected part of the employment system, it can even be used as a recruitment tool. If you’re wondering which incentive is best for you, here are the most popular incentive compensation programs ranked and explained.

1 Profit-Sharing

You get what you put in. For the employee, it can be the most accessible way to invest in their future. A company can offer to share their gains or profits directly with employees through various channels, such as deferred compensation. This is a long-term incentive program to retain and motivate employees to strive towards hitting higher individual goals and further elevate the company as a whole. The best example (and arguably most recognizable) would be the 401(k) plan where a percentage of an employee’s annual compensation is contributed. A company can share its profits by offering to contribute a percentage that matches its after-tax profits. This type of program would be an obvious incentive to employees planning towards retirement, but it also would provide employees an encouraging insight into how their hard work adds to both the company’s bottom line and their own.

2 Cash Bonuses

Cold hard cash. It’s hard to beat, which is why it is high in our ranking. Cash bonus incentives can either be short term (annual bonus) or long term (multiyear) or a spot bonus (performance-based, often one time). The most well-known and talked about is the short-term annual bonus. Usually applied to the corporate setting at mid to senior positions, the short- and long-term bonuses are generally locked in and expected whereas a spot bonus is based on performance and to the discretion of the management. This could be a reward for a job well done on a big project or a onetime end of the year bonus as recognition for all your hard work. This type of incentive is probably the most prevalent across industries. There is a lot of freedom for the employee with straight-up cash, but some may prefer a more protracted and propagating option.

3 Stocks Options

Another form of profit-sharing, this incentive is also a long-term program with a betting feature. Offering stock options allows the employee to buy company stock at a set price, regardless of what the stock’s current market value is. The expectation is that the price of the stock will rise above the set price before the stock option is used, which will, in turn, make the employee a profit. Stock options or equity often have a vesting schedule which either spreads out the employee’s ownership of the stock over some time or receiving all of it after some time. This incentive is traditionally applied in a corporate setting to more senior-level employees. But in the age of startups, stock options have been used as an enticing way to recruit and retain

long term and highly skilled employees. Having a share in the company can create a culture of ownership amongst the team and generate a more motivated effort to not only work harder but smarter as well. The risk factor with a stock option is betting that the company and its stock remain successful while the market grows.

4 Retention Bonus

The ‘What will it take to make you stay?’ bonus. Although this type of incentive may seem more applicable to senior-level positions or singular situations, it can also be taken advantage of by an employee in any field that knows their value and will ask for what they are worth. The opportunity to negotiate your reward is what puts this incentive on our list. This incentive can be offered to a highly valued employee when they have announced their intentions to move on. More often than not, it will be a bump in their annual salary/wages, an additional bonus, or even a promotion. It can also be offered to preempt an exit from happening and ensure that employee stays either during a crucial event or periods like a merger or acquisition. With this incentive, the employee is in the driver’s seat of this company car.

Honorable Mentions:

Team/Individual Health Rewards

The rise in health and wellness has created a new avenue of team building for many mid to large companies. Providing fitness resources to departments or small teams to track their progress and offer different prizes, in the end, the goal is to inspire the employees to live healthier and bond together as a team. The rewards are usually small cash prizes or coveted product such as a tablet or phone upgrade. In the end, a healthier team is a happier team, and a happier team is a more productive team. It’s a win for everyone.

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