There are many different types of incentive pay plans, but their main aim is to increase employee morale and ultimately boost the overall productivity of the company. To benefit from these plans, employees need to either meet or exceed their goals. Based on the company’s compensation philosophy, the incentive plan may range from complex programs based on weighted factors and graduated payouts to simple one-time bonuses.
Some of the most common types of incentive pay plans include:
On-the-spot bonuses: This is the simplest type of incentive pay plan, where employees are offered benefits on the spot for going above and beyond their responsibilities, such as cash, gift cards, and movie tickets. Be aware that there are special IRS rules on gift cards to employees.
Suggestion programs: Companies can encourage their employees to think creatively and reward helpful ideas through suggestion programs. The incentives may be offered at a flat rate or tied to the benefits resulting from the suggestion.
Profit sharing: This refers to the quarter or year-end bonuses offered by a company based on its profitability during that period. These payouts are typically distributed across the firm. The idea behind this type of incentive pay plan is to motivate the company as a whole to focus on a common goal.
The process of profit sharing begins with budgeting, which helps establish a percentage of profits. The incentive plan is formed based on this percentage and communicated across the company.
Stock options: This type of incentive plan offers employees the option of buying company stock. Apart from a boost in morale, employee ownership gives employees a true stake in the future of the company.