An incentive compensation plan is a program that offers a reward or recognition in exchange for performance. There are several varieties of these reward and recognition plans. Commonly recognized business strategies, such as customer reward programs or commission paid to employees, are examples of the incentive compensation plan in action.
Customer reward programs are a common form of incentive compensation plan. These programs are designed to influence customer behaviors or promote purchases of a certain product or service. This form of compensation plan may include cash back incentives, certain sales or promotions, or customer discounts for referring new customers. The basic goal of this strategy is to create an environment in which the customer wants to buy a product or promote a service to receive a reward. It is a common strategy among credit card companies and retailers to encourage purchasing behaviors.
In the corporate world, incentive programs are often used for employee motivation. When an employer wants to boost employee morale, they may introduce an incentive compensation program to motivate the staff. Incentives sometimes include non-monetary rewards such as employee and family events, company vacations, or other prizes. In some cases, one-time monetary rewards may also be offered. A common example is the employee of the month program used by many companies.
The incentive compensation plan can also be used for employee retention. In businesses that experience a high staff turnover rate, management may choose to implement employee retention programs. Employees who stay with the company for a period of time may be offered incentives in the form of a raise in salary, monetary bonus, or public recognition of the individual's service and loyalty. Companies who utilize this type of incentive program often come from industries where competing companies tend to recruit experienced employees away from other companies.
Another form of incentive compensation plan is the employee incentive program. Retail companies sometimes give employees an opportunity to benefit from demonstrating sales ability by offering commissions. A commission is a monetary reward for making a sale. In addition to commission-based salary programs, some corporations also offer other incentives, such as award ceremonies, travel opportunities, or automobiles. One well-known example of a company using this kind of incentive compensation plan is Mary Kay Cosmetics. The Mary Kay cosmetic company gave each of their five top salespeople a pink Cadillac in 1969 and continue to offer incentives to employees with high levels of sales.