Ways of Incentive Calculation

Bonuses, variable pay, commissions and other forms of incentives can be a great way of encouraging your employees to improve their individual and team performances. Incentives calculation can be done for the sales team, product teams, development teams, and other teams as well depending on which aspect of the business you want to improve. Companies have been using incentive programs for a long time to keep their employees motivated and on a path of achieving business objectives in hopes of getting a personal reward.

Here are some of the different ways in which you can design your incentive schemes and some of the key parameters that are needed for an incentive program.

Different ways of designing incentive schemes

Sales vs Target Bonus

One of the two most used forms of calculation is compensation and commissioning. In the compensation process, an employee is given incentives based on one or more measurable objectives. For instance, achieving a certain quarterly target can act as the threshold for the employee to get an incentive.

As for commissioning, the employee is paid a percentage of the turnover or revenue he brings to the company. In other words, the employee receives an incentive bonus based on the total sales he does. These calculation methods are, however, not 100% efficient and depend largely on the objective and target’s defined by the organization. Poorly defined compensation or commission incentive schemes can lead to a decline in sales and even discourage your employees from going the extra mile.

Ranking

This might be the simplest method to calculate incentives for your employees. A business can define incentives for different employees and teams based on their performance with the best employee or team receiving the highest bonus. This is a great option for companies that have a large sales team and they want to motivate the sales reps in selling as much as they can in order to receive the incentive at the end of the term.

One of the biggest advantages of this system is that it turns business objectives into a kind of game and encourages healthy competition among the employees to achieve sales targets.

Key Parameters for a Successful Employee Incentive Compensation Programs

No matter which way you choose for incentive calculation, there are a few key parameters that you need to establish for elevating the corporate performance. Here are some of the key parameters that every incentive scheme should have:

Eligibility

This is one of the first criteria for planning your incentive scheme. Deciding which employee is eligible for receiving the compensation makes the process a bit easier. There are two criteria for determining the eligibility of an employee:

  1. Which employees will be eligible for the compensation. Is it full-time employees only? Are part-timers eligible? Temporary staff? Etc.
  2. When does an employee become eligible, For instance, a new employee can only start receiving incentives after he has reached a certain job stage while a retiring employee won’t receive any incentive for the last quarter and so on.

Measures

Measuring your employee’s performance can be crucial in determining the minimum threshold level for success and payouts. It is suggested to focus only on 3 to 5 measurable attributes or KPIs to get a good sense of your company’s performance. If an employee surpasses the measurement metric, he or his team will be eligible for the incentive.

Weights

While measuring the company performance and setting realistic goals for them to achieve is an appropriate way of calculating the incentive, you should weighting factors in mind as well. For instance, individual performance can be totally different from team’s performance and if an employee achieves their individual target before the stipulated timeline then his contribution should weigh in the final compensation program irrespective of whether his team was able to achieve the target or not.

Payout Levels and Amounts

Another important factor is deciding how you’ll pay incentives to your employees and would there be different payout levels for different goals and job stages. These are important questions and should be considered while setting up the incentive program.

Payout Frequency

Depending on your company’s budgets, target-setting activities, and available funding, you need to decide on the payout frequency as well. Would the incentives be given every quarter, half-yearly basis, annually or after every sales target is achieved. The payout frequency is an important part of your sales compensation plans.

Employee incentive programs are important for a business but can be a complex process to figure out. Incentive calculation depends on a number of different factors that revolve around your employees and the organization. A good incentive program can be the driving force behind a company’s success and can encourage its employees to work better for achieving the targets and getting the incentive. Understand the essential parameters explained above and create an incentive program that is best suited for your business.

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