Incentive Compensation

Incentive compensation is a financial reward system designed to motivate employees and improve performance by linking pay to individual or team achievements. Common types of incentive compensation include performance bonuses, profit-sharing, sales commissions, and stock options. These incentives encourage employees to exceed expectations and align their efforts with organizational goals.

A well-structured incentive compensation plan enhances employee motivation, retention, and job satisfaction. HR professionals must carefully design these programs to ensure fairness, competitiveness, and compliance with labor laws while maintaining alignment with company objectives.

What is an example of incentive-based compensation?

An example of incentive-based compensation is a sales commission, where employees earn a percentage of the sales they make. Other examples include performance bonuses, profit-sharing, or stock options—designed to reward employees for meeting or exceeding specific goals.