For modern sales forces, offering base salary alone isn’t always enough to inspire the level of effort, persistence, and creativity needed to close deals and generate significant revenue in today’s market.

This is where incentive compensation comes in.  

Incentive compensation (done right) is a catalyst for increased productivity, and fosters a sense of urgency and purpose among sales representatives. It directly links an individual’s effort to a financial reward and the company's overarching success.

In fact, a well-structured incentive program can lead to an average uptick in productivity by 25%.

However, incentive plans shouldn’t be managed with a one-size-fits-all approach.

Flexible and strategic incentive compensation plans help organizations adapt to competitive market conditions. Sales compensation should ultimately be a dynamic way to drive performance.  

Top sales talent is attracted to companies that offer lucrative incentives through well-structured incentive plans. Plus, they are more likely to remain with organizations that consistently reward achievements.

In this explainer on incentive compensation management (ICM), we'll walk through the benefits of a well-designed program, ICM software, the key challenges faced by organizations today. We'll also cover how we recommend approaching the design of an effective ICM plan.

Aligning on a definition: What is incentive compensation management?

Before getting into incentive compensation management, we need to answer: What is incentive based compensation?

Incentive compensation is the additional reward given to employees in addition to their base salary for achieving and surpassing performance and productivity goals. Incentive compensation is most common for sales teams, where sales representatives are compensated based on their activities, meeting sales quotas, or the financial results they bring to the business.  

Incentive compensation is a significant budget item. We've historically found it can account for approximately 15% of top-line spending in organizations. When executed correctly, it can be a powerful lever for generating revenue.

While specifics vary, incentive compensation typically includes elements like a base salary, commission, and other incentives aimed at driving a specific business result in a sales organization.

At Forma.ai, we see Incentive Compensation Management (ICM) as two interconnected but distinct functions:  

1. The strategy and design of your incentive compensation scheme, and  

2. The processes and workflows for tracking, calculating, and administering the program.  

Both functions need to work in harmony to achieve optimal outcomes from your incentive program.

So, what are the types of incentive compensation?

Incentive compensation can fit into two categories: short-term and long-term incentive comp. A combination of both can be deployed within your incentive compensation program to produce optimal results in given timeframes.

Short-term incentive compensation examples

Short-term incentives (STI) are an important part of any incentive compensation package. These are typically earned within a year, paid out on regular pay cheques, and require meeting specific criteria.
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Examples include:

• Bonuses: A well-defined amount of money a sales rep will earn for reaching a defined goal.

• Commission: A percentage of earnings or revenue generated by the sales rep.

Long-term incentive compensation examples

Long-term incentives (LTI) are focused on bolstering employee performance in the long-run. They're a great way to encourage employees to buy into the company’s long-term vision by providing them with their own stake in the overall success.

Long-term annual incentive plan examples include:

• Stock options: granted to the employee over a designated vesting schedule.

• Performance shares: Full-value shares awarded to the employee based on meeting performance goals.

• Equity-based pay: A non-cash form of compensation of company equity based on a schedule or performance goals.

• Cash-units: Cash-based grants paid out based on a vesting schedule or performance achievement.

The benefits of implementing an incentive compensation management plan

There are many benefits to incentive compensation management. But we’ll stick to covering the top three advantages.

1. You can align sales activity to core business growth objectives via incentives

Incentive compensation ultimately aligns representatives' activities or behaviors with a business's strategic goals. By structuring compensation around specific, high-impact actions—such as closing certain types of deals, acquiring new customers, or promoting key products—sales reps are motivated to focus on what your organization has determined, through data and research, truly matters.  

Effective ICM management ensures sales efforts directly contribute to the company’s top priorities and OKRs, minimizing wasted resources on non-revenue-driving activities. Optimized incentive comp helps you positively direct sales output and effectiveness.

When sales reps concentrate on actions directly influencing revenue growth and market expansion, the company sees improved customer acquisition and retention rates. This strategic alignment creates a cohesive effort across the organization, which in turn drives sustained growth (a massive competitive advantage).  

2. You can improve employee motivation, collaboration, and engagement

At the end of the day, sales can be a difficult grind.

Sales reps with long, enterprise sales cycles are constantly pushing boulders uphill. They face rejection, pushed out timelines, lots of grunt work, and other barriers to success.  

High-performers persevere despite the ups and downs. Regardless, incentive compensation with fair, balanced quotas and territories ultimately help keep sales teams motivated and engaged. Sales incentives provide a reward for perseverance, and enable more autonomy and control over earnings.  

Besides enhancing individual performance, incentive compensation promotes a competitive and collaborative environment within entire sales teams.  

Working as a team is important, but not easy. According to the State of Sales report, 81% of sellers say selling as a team helps them close deals, but 82% say alignment with other sellers is challenging.

When team members know their combined efforts lead to tangible rewards, they're more likely to share best practices with teammates, support each other, and collectively strive for organizational excellence. This collaboration increases overall sales productivity and job satisfaction, leading to a more cohesive team.

3. You can enhance employee retention and recruitment at the organizational level

The top challenges of incentive compensation management

Effective ICM requires consistent risk assessment and check-ins.  

It’s critical to keep tabs on potential risks associated with your compensation plans, like over-reliance on a single metric or unintended consequences that might arise. Regular analysis helps mitigate these risks and maintain the integrity of your incentive programs.  

Below are a set of common challenges that can hinder ICM effectiveness most:      

1. Managing the complexity of incentive comp design while remaining flexible

The intricacies involved in setting the right performance metrics, thresholds, and payout structures can become overwhelming. Without access to a sophisticated system and robust data to inform decision making, it’s easy to lose sight of essential KPIs and short-term and long-term objectives.     

Not only is managing a complex incentive plan complex, but ensuring there’s room for flexibility as you scale can be even more challenging. Investing in incentive compensation management software upfront can help you remain competitive and agile.

2. Accidentally encouraging undesirable behavior

Encouraging certain behaviors through compensation can be a slippery slope. Some employees will go to great lengths to meet targets, even if it’s not ideal for your business.  

Regularly reviewing and adjusting metrics to ensure alignment between outcomes and actions will help make sure incentives actually reinforce positive behaviors.  

3. Becoming over-reliant on a single metric

If you’re not constantly evaluating your incentive compensation program and what types of incentive compensation you’re offering, you might assume it’s working when it’s not.  

It’s important to broaden your focus and zoom out to consider all important objectives. Diversifying the metrics you use to measure performance can produce more holistic and effective results.

How to identify if you're running an ineffective incentive compensation management program

The symptoms of a poor incentive compensation program are painful. Here’s what to look out for:  

• Misaligned seller behaviors

• Overlooked revenue opportunities, and

• Diminished confidence among sales teams regarding the connection between their efforts and financial rewards (this will look like high sales team turnover).

There’s a fine balance between incentivizing to achieve ambitious targets and ensuring your compensation strategy aligns with broader business objectives.

The power of incentive compensation management software

The emergence of incentive compensation management software several years ago helped organizations solve for mission-critical pain points; largely in administering sales compensation, such as with commissions software.  

The first iteration of these solutions helped businesses and sales compensation teams:  

• Reduce errors and time-consuming effort to calculate ICM. By accurately processing data inputs and eliminating manual, error-prone tasks, these tools helped ensure precise and timely payouts.

• Improve payout visibility and transparency to the sales team. With real-time dashboards and detailed reports, these tools enabled sales teams to track performance and earnings accurately and transparently.

Now, modern ICM software provides advanced calculation capabilities, automates complex incentive schemes, and provides a level of transparency to sales teams that was otherwise previously unavailable.  

Challenges with legacy ICM software

While some companies are further along their ICM automation journey than others, many still suffer from the biggest pain point and challenge outstanding in ICM today: agility.  

Achieving organizational agility when relying on legacy software is challenging due to several factors:  

1. First, many traditional ICM systems are rigid and lack the flexibility needed to adapt to changing business environments and strategies. These systems often require extensive customization, which can be time-consuming and costly.  

2. More importantly, integrating sales compensation software with existing IT infrastructure can be complex, leading to potential compatibility issues and data silos. Siloed data like this means that every time a new incentive change needs to be modelled, there is extensive work required to get data into a usable format, and then further work to implement these changes into ICM.  

This lack of agility and siloed data means that despite ICM software existing to help automate sales compensation, organizations still have suboptimal plans that don’t align with strategy, or costly plans that overspend for incorrect outcomes.  

Why ICM software is important for modern sales and ops teams

The incentive management space is going through a significant revamp in how it looks to technology to support its efforts.  

After years of clunky legacy systems dominating the software landscape, fresh incumbents have ushered in a new age of how to handle sales performance data with features powered by AI, automation, and even behavioral science.  

Modern ICM software helps your streamline processes, including:

• Forecasting the outcome of potential incentive compensation plans before launch

• Calculating individual and team-wide commissions  

• Automating financial reporting associated with sales compensation (i.e. capitalizing commission expenses, or calculating commission accruals)

• Automating incentive payouts to improve accuracy  

• Creating real-time reporting dashboards to efficiently monitor sales performance

It’s become more important than ever to adopt ICM software as you scale. Companies that stick with legacy software and manual Excel spreadsheets will soon be left behind.  

Developing a market-leading ICM program with the help of incentive compensation management software

Here at Forma.ai, we are accelerating SPM for enterprise companies by unifying planning and execution for ICM management, as well as territory and quota management (TQM)—all in one comprehensive platform.

Here's a look at why global sales and revenue operations teams trust us for both sales planning capabilities and incentive compensation:

When adopting ICM software, many organizations first solve for base-level administrative challenges like payout errors and visibility. However, once these essentials are covered, it's critical to scale with more sophisticated capabilities, such as unlocking a new level of agility around sales planning seasonally, and any-time updates to your plans.  

This realistically requires adoption of robust sales performance management (SPM) software.  

A full-stack SPM solution, like Forma.ai, helps organizations rapidly create, optimize, and deploy incentive compensation programs, and gain infinite flex capability of in-house compensation teams.

Your business needs the flexibility to both design and optimize incentive structures every time a strategic need arises (e.g. sales team restructuring, strategy acquisition, product launch, etc.), all the while implementing and tracking plan updates or refinements effectively.  

Real-world results: How Autodesk streamlined ICM with Forma.ai

Before Forma.ai, Autodesk, a software company that provides 3D design, engineering, and construction software across a multitude of industries, had reached a critical point. With over 2500+ salespeople and 1900 channel partners, their incentive compensation management was mature and intricate, but no longer serving them.

A patchwork of legacy systems and in-house solutions created significant barriers to scaling and automating their ICM. The team faced real challenges:  

• Lack of flexibility: Their current solution didn’t allow for the agility needed to adopt modern sales processes.

• Lack of unified data and limited insights: Their fragmented system didn’t allow for in-depth analytics and predictive modeling, keeping the organization from being proactive.

• Manual time consuming processes: Compensation analysts were bogged down with manual calculations and inefficient workflows.  

As Dr. Robert Bieshaar, Senior Director for Worldwide Sales Compensation and Acquisitions at Autodesk,  shared, “We needed an analytics environment that uses ICM data to be able to predict what is going to happen in our sales organization and what we should be focused on.”

After evaluating the current players in the ICM software space, Autodesk chose Forma.ai as its full-stack SPM solution.

The Autodesk team transformed with incentive compensation management after implementing Forma.ai. Here’s how:  

• Unhindered flexibility and scalability: Without being limited by a clunky UI, Robert’s team could define, configure, and customize any plan type and rollout in a matter of days.

• Optimized decision making: Forma.ai’s modeling capabilities allowed the team to make data-informed decisions, predicting the real impact of potential incentive plans before implementation.

• Increased efficiency and productivity: Streamlined comp design and testing processes have freed up Autodesk’s compensation analysts to focus on higher-value activities.

• Improved sales team engagement: Sellers now have a direct feedback loop to visualize the real impact of their efforts on the pipeline.

Incentive compensation management software has empowered the Autodesk team to modernize, automate, and transform their incentive program for the better.  

Some key components and terminology of incentive compensation plans

Before exploring how to implement an ICM program, it’s important to understand the key terminology of effective incentive compensation plans:

• Plan type: A plan type establishes the overall framework, such as commission-based or bonus-based schemes.  

• Pay mix: The balance between fixed salary and variable incentives. A pay mix ratio helps ensure stability while also motivating high performance.  

• Rate structure: How incentives are calculated, often using tiered rates to reward higher achievements. What's known as a 'payout curve' illustrates the relationship between performance and earnings, showing how compensation increases with improved results.

• Number of plan components: This number should be manageable to keep your organization's plan straightforward and understandable, typically including base salary, commissions, and bonuses.  

• Metrics: The metrics that the plan is measured against are crucial, detailing the performance criteria like sales volume, new customer acquisition, or product-specific targets that qualify for incentives.  

• Period: The time frame for measuring performance, such as monthly, quarterly, or annually, ensuring timely and relevant rewards.  

Together, these components create a cohesive and motivating compensation plan that drives sales effectiveness and aligns with business objectives.

The 5 core steps to designing effective incentive compensation management plans

Below are the fundamental steps involved in designing an effective ICM plan.

1. Understand your business objectives and market

First, clearly define the objectives of the plan. These may be organizational goals including:  

• increasing sales volume,  

• entering new markets, or  

• promoting specific products.  

These goals should be measurable and aligned with the company’s strategic priorities.  

2. Tailor incentive compensation management plans to different sales roles

Next, select the appropriate plan type, whether this is commission-based, bonus-based, or a hybrid, to match the company’s sales structure and market conditions.  

The pay mix of fixed salary and variable incentives should be designed to provide financial stability while also motivating top performance.  

Depending on the nature of the sales role, the pay mix may over or under-index on its aggressiveness (i.e. typically ‘hunter’ acquisition roles have a higher variable component than ‘farmer’ account management roles).  

3. Assign metrics and components

Based on the business objectives to be achieved, choose relevant performance metrics that reflect key business drivers, such as revenue, customer acquisition, or product-specific sales.  

You'll want to limit the number of plan components to maintain simplicity, typically including base salary, commissions, and bonuses. Best practices suggest no more than 4 plan components (or any plan component contributing to no less than 25% of variable earning potential).  

4. Set rate structure and payout curve

It’s important to establish a rate structure, incorporating tiered rates that reward higher levels of achievement.  

This structure needs to be transparent and easy to understand, so employees know exactly how their efforts translate into earnings. Your sales compensation team ultimately designs a payout curve that illustrates how compensation increases with performance, encouraging reps to exceed their targets.  

5. Set the payout periods

Lastly, sales compensation teams align with sales leaders to define the period for performance measurement, whether this is monthly, quarterly, or annually, to ensure timely and relevant rewards.  

Key considerations when defining your incentive comp payout period  

• Business cycles and sales strategy: Align payout periods with the natural business cycles of your company. I.e., if your industry has quarterly sales peaks, quarterly payout periods might make sense.

• Sales cycle length: Consider the average length of your sales cycle. Shorter cycles may benefit from monthly or quarterly payouts to keep sales representatives motivated and continuously engaged. Longer cycles might necessitate semi-annual or annual payouts to reflect the time required to close deals.

• Cash flow management: Aligning payout periods with your company’s cash flow can ensure financial stability. Frequent payouts may strain cash flow, while less frequent payouts can help manage finances better but might demotivate sales teams if they have to wait too long for their earnings.

• Motivation and engagement: Shorter payout periods can keep sales representatives consistently motivated by providing regular rewards for their efforts. However, combining them with longer-term bonuses can balance immediate gratification with long-term goals.

• Market norms: Consider industry standards and what competitors are doing. Aligning your payout periods with market norms can help attract and retain top talent who expect similar structures.  

Once you have your initial incentive plan structure developed, you can begin modelling your plan to predict what the financial impact will be to the business and individual sellers, using Excel or ICM software with planning and modeling features, like Forma.ai. This will be an iterative process whereby you may tweak variables identified in the steps above to adjust the expected outcome.  

During the plan design process, it is often helpful to establish a sales compensation committee composed of key stakeholders that have a vested interest in the eventual plan design. Typically this may include stakeholders from Sales, Sales Operations, Human Resources, and Finance. Creating this Braintrust in your org ensures that the design process is collaborative and results in an incentive comp plan that reflects all the different priorities within a business.  

Best practices for implementing incentive compensation management plans

Once the incentive plan has been designed and buy-in has been achieved, the new plans can be deployed to the sales team.  

Considering the complexity, this change management exercise is worth its own detailed step-by-step guidebook, but at a high-level the most important things you need to do include:  

1. Align incentives with business goals

To run a successful incentive compensation management program, it’s essential to ensure alignment with wider company goals. Getting clear on what the overarching organization is focusing on each quarter or year will help guide how you structure and communicate your plan.  

Incentives can help sales reps visualize how their efforts ladder up to broader company goals and incentivize them to produce the results company leadership is looking for.

For example, if your company is focused on expansion, creating incentives that reward landing clients in new markets can help employees understand exactly how you want them to contribute.

2. Over-communicate and give transparency

Implementing a new sales compensation plan requires clear communication and transparency.  

• Begin by explaining the plan’s objectives, structure, and benefits to the sales team.  

• Provide detailed documentation, host training sessions, and maintain open channels for questions.  

• Regularly update and involve the team to ensure understanding and engagement.  

A comprehensive approach to the comms plan will help create a compensation plan that actually drives performance and supports the company’s success.

3. Leverage automation and technology

ICM and SPM tools have been purposefully developed to help automate incentive compensation calculations and provide reporting and performance tracking for sales teams and leaders.  

Finding a solution that's flexible enough to handle your unique plan requirements and data, but easy to configure and manage will help ensure you get the most out of your platform.  

To ensure widespread adoption, consider change management practices and provide training on your ICM or SPM tools internally, and leverage the data analytics within these powerful platforms to continuously optimize and adjust the plans and individual understanding of performance to goals.

4. Don't set and forget: Ongoing monitoring and adjustments are crucial

The only constant in sales compensation is change. Eventually your plans will require tweaks and constant alignment to business strategy as it evolves throughout the year. To proactively ensure  your plans are driving intended results, set regular check-in points to review plan performance both quantitatively and qualitatively.  

This includes measuring plan and performance metrics through analytical tools and comparing results against goals. This also includes gathering feedback from sales teams, and managers to ensure compliance to the plan.  

Continuous monitoring ensures the plan aligns with business objectives and drives desired outcomes effectively.

Incentive compensation management FAQs

How does ICM differ from traditional compensation?  

Traditional compensation is based on a fixed hourly rate or annual salary. It is agreed upon when employment commences and is formally changed when an employee is given a promotion, change of responsibilities, or raise. Traditional compensation isn’t adjusted to incentivize performance.  

Conversely, incentive pay is compensation that's awarded based on performance and outcomes, like bonuses and commission. It is used in addition to or as a replacement for traditional comp. Some companies offer a mix of base pay and incentive compensation (variable compensation), while others just offer incentive compensation.

What are the benefits of ICM software?

As your company grows and you hire more salespeople, managing ICM without the help of software will become a nearly impossible feat. ICM software helps:

1. Reduce the manual workload on commission analysts and revenue leaders by automating calculations and modeling.

2. Identify underperforming incentive plans that leave money on the table.

3. Empower the sales team to fully understand how to achieve goals and how their efforts contribute to pipeline and revenue.

4. Design effective incentive compensation programs based on AI suggestions and behavioral science.

Why is incentive compensation management important for sales and revenue teams?

Transparent, well-structured incentive compensation management is crucial for sales and revenue teams.

Overly complex ICM plans can be confusing for salespeople and make it difficult to understand what goals they are working towards and how they will be compensated for achieving them. Plus, outdated plans may be misaligned with what is actually motivating to salespeople and to the company’s goals, benefiting no one.  

By implementing an agile, technology-driven incentive compensation management plan, companies can ensure their incentives both motivate the sales team and produce ideal business results.

What are characteristics of the best incentive compensation plans?

The best incentive compensation plans are:

• Transparent: Communicates and defines goals clearly.

• Aligned with company goals: Reinforces broader company efforts and strategic direction.

• Timely: Pays out salespeople timely and accurately.

• Measurable: Offers accessible reporting.