What are Bonus and Incentives, How are these determined?

Bonus and Incentives

Variable compensation is the pay a company gives its employees based on their performance. It is usually in addition to a fixed base salary. This pay comes in a variety of forms, including: Bonuses, Commissions

Variable Compensation Program Types

There are various types of variable pay. Firms can select the best plan for their staff and company philosophy from a variety of options.

There are three main types of variable compensation programmes available which can be efficiently calculated using sales compensation software:

1. Bonus

You offer variable pay as a bonus programme for finishing a job. As a result, bonuses are contingent on whether or not you complete a task. It also necessitates that you meet predetermined conditions that a company defines in advance.

The following are some examples of bonus plans used by businesses:

Project bonus – 

This compensation can be discretionary or non-discretionary. Firms provide this incentive to employees who complete a project. Projects involving a bonus frequently include successfully meeting the budget and time constraints.

Referral bonus –

A staff member receives a referral bonus after referring to an applicant who is hired by the venture. It varies according to the position level involved. Companies typically pay this type of bonus after the recruit has been employed for a specified period of time. Employers who use 90 days as the onboarding period, for example, will give their reward at the end of that time

Sign-on bonus – 

This type of bonus is given to prospective new hires as an incentive to accept an offer. A cash bonus is primarily used by businesses to make a more competitive offer and close the candidate. They also rely on sign-on pay to cover any losses that potential new hires may incur. The bonuses compensate them for the wages they would lose if they left their current jobs.

2. Incentives

To increase revenue, this variable pay plan employs specific performance targets. A company sets these objectives in advance for the relevant performance period. As a result, an employee receives compensation for meeting the established criteria.

Furthermore, the criteria can trigger higher or lower compensation based on how well the staff met the expected targets.

Plans for Short-Term Incentive

These incentive pay plans are contingent on meeting short-term performance goals. To facilitate short-term output, they typically range for a year or less. Here are a few examples:

Management programmes are designed for middle and upper management. The incentives are determined by meeting specific firm output goals. 

Profit-sharing plans – 

These plans are implemented when a company meets a predetermined financial goal. As an award, the company can contribute to a non-qualified or qualified retirement plan. Employers can also provide cash incentives to their employees.

Gainsharing programmes – 

These programmes aim to share productivity gains with the entire staff.

Variable pay plans for sales management or sales agents are known as sales incentive programmes. In general, a company bases its awards on the achievement of sales targets. 

Sales bonuses, straight commissions, contests, and salary plus commissions are all possibilities.

Long-Term Incentive Schemes

Unlike the short-term types, this sales compensation plan is based on meeting performance goals over a multi-year period. It typically lasts three to five years and is designed to boost long-term output. 

There are two kinds of long-term incentive plans that can be used for variable pay for employees: 

Cash-based programmes- 

Rely on achieving goals over a long period of time. Some businesses prefer cash incentives to the alternative option, equity-based plans. Furthermore, the cash method allows investors to avoid share dilution management. They also keep shares from being depleted.

Programs based on equity – 

Long-term plans take the form of equity. They rise during a specific time period.

The plans rely on stock market and company performance to determine success. They intend to align with the interests of investors.

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