Incentive Plan Type
An incentive plan type refers to the specific category or structure of an incentive plan used by organizations to motivate and reward their employees based on performance, goals, rankings, objectives, or earnings.
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Goal Achievement
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Ranking
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Management by Objectives
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Commission
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Matrix
Goal Achievement
A goal-based incentive plan rewards employees (IC) based on their individual/team performance relative to a target derived from past sales and future projections, motivating them to exceed it.
For this plan’s effectiveness, an accurate national forecast is crucial to ensure realistic and achievable targets, especially for mature products, as they have an established market, sales history, and more accurate forecasts.
Pros
Simplicity: easy communication, accurate evaluation of individual performance.
Clear targets enhance employee understanding and expectations.
Fiscal responsibility, as it aligns with the company’s financial goals.
Performance-based rewards encourage collaboration, avoiding competition among employees.
Cons
Without accurate national forecasts, target achievement becomes uncertain for all territories.
Setting accurate territory-level goals is technically challenging.
Complexity in implementation and governance of the plan
Inaccurate goals or complex methodologies breed demotivation and perceived unfairness.
Ranking
A ranking-based incentive plan compensates employees based on their performance compared to peers, utilizing sales, growth, or achievement metrics for ranking and payment.
This plan suits uncertain markets, lacking reliable historical data or forecasts, by offering flexibility and adaptability without specific targets or quotas.
Ranking plans align incentives with business objectives, motivating salespeople to surpass peers and boost sales, particularly for large sales forces.
Pros
Simplicity: easy communication, accurate evaluation of individual performance.
Fixed incentive outflow maintains fiscal responsibility regardless of employee performance levels.
Encourages healthy competition, improves performance, and motivates through peer comparison and progress tracking.
Adapts to unreliable data, no specific targets or quotas, offering flexibility amid market changes.
Aligns with business objectives and rewards relative performance compared to peers.
Cons
Payouts disregard national performance, relying solely on peer comparisons instead of overall business goals.
Perceived unfairness due to difficulty in balancing ranking criteria across employees.
Unhealthy competition and collaboration decline if perceived unfairness in comparisons and rewards.
Designing fair and motivating ranking systems for all employees is challenging.
Fails to drive desired behavior, and is not aligned with business objectives.
Management by Objectives
MBO incentive plans are based on pre-defined objectives and not sales data. These objectives should be specific, measurable, attainable, relevant, and time-bound (SMART). Such plans focus on aligning managerial goals with overall business objectives.
This plan is effective for businesses seeking to align management team goals with the overall business strategy. Moreover, it allows managers to see the progress they are making towards achieving their goals, which can be motivating.
It is typically used by management positions, not directly tied to sales but focuses on cost management, productivity, customer satisfaction, and employee engagement.
Pros
Simplicity: easy communication, accurate evaluation of individual performance.
Fixed incentive outflow maintains fiscal responsibility regardless of employee performance levels.
Promotes collaboration by focusing on individual performance, not competition among employees..
Adapts to unreliable data, no specific targets or quotas, offering flexibility amid market changes.
Aligns with business objectives and rewards relative performance compared to peers.
Cons
Payouts disregard national performance, relying solely on peer comparisons instead of overall business goals.
Perceived unfairness due to difficulty in balancing ranking criteria across employees.
Unhealthy competition and collaboration decline if perceived unfairness in comparisons and rewards.
Designing fair and motivating ranking systems for all employees is challenging.
Fails to drive desired behavior, and is not aligned with business objectives.
Commission
A commission-based incentive plan rewards employees with a percentage of total sales, offering flexibility in commission rates based on performance levels.
This plan suits new products, relying on sales as a crucial metric for success, allowing commission rate adjustments as the market evolves. It greatly benefits sales teams, motivating increased sales and market share growth during new product launches.
Pros
The plan’s simplicity facilitates effective communication with customers, driving successful sales.
A high perceived reward is directly tied to individual sales and motivates & engages sales reps.
Promotes collaboration by focusing on individual performance, not competition among employees.
Transparent and easy to track, which facilitates goal setting and measuring employee sales performance.
Cons
Perceived unfairness arises from imbalanced commission rates across employees.
Not always fiscally responsible due to lack of built-in controls.
Fails in driving desired behavior, neglecting factors like customer satisfaction and product quality.
Such plans risk prioritizing short-term sales over long-term customer relationships, harming overall business.
Matrix
A matrix incentive plan combines two performance metrics to determine payouts, making it ideal for expanding products with predictable share growth and the need for additional outcomes.
For instance, one metric could be sales performance and the other could be market share growth. The plan incentivizes both high sales and market share growth, with payouts based on performance across these metrics.
Matrix incentive plans balance short-term and long-term results, and align sales behavior with organizational goals. Designing and implementing them is complex, requiring careful consideration of metric interplay to incentivize desired behavior.
Pros
The plan’s structure is straightforward and easy for sales representatives to understand.
Balances performance across multiple areas, promoting overall success and growth leading to a more fair and just reward system.
Encourages teamwork and collaboration, avoiding unhealthy competition among sales reps.
Rewards reps, boost their motivation, and drive improved results through target achievement.
Plan promotes teamwork, aligns with brand strategy, and focuses on common objectives for sales representatives.
Cons
Matrix incentive plans can be complex, leading to confusion and decreased motivation among sales reps.
Matrix incentive plans require careful consideration of the metrics used, as conflicting goals and outcomes may arise when multiple metrics are used.
The plan fails to adequately incentivize individual sales performance, undermining motivation and recognition.
Inaccurate data skews matrix incentive plan results, sabotaging sales reps’ performance.
Multiple combined metrics can confuse sales reps’ understanding of performance measurement and rewards.