“Incentive compensation makes no distinction between male and female employees, but it does objectively set apart top performers from everyone else” – Fabien Lucron, development director at Primeum and incentive compensation expert, Tribune Les Echos
Incentive compensation is available in many different systems and is not simply a matter of awarding a bonus to the best performing salespeople. On the contrary, it is a real asset in a company’s remuneration policy and can be adapted to the different roles of staff to value their involvement in the company at all hierarchical levels. In the following article, we explain four reasons to introduce incentive compensation.
1. With incentive compensation in place, a company can manage its wage costs
“Remuneration is often the first budget item. Keeping costs under control is a good thing, but the ultimate goal is to establish an efficient compensation policy to create value.” (“Why and how to manage your payroll?”, Manager GO ! 2021)
All the subtlety of a company’s remuneration policy comes down to finding the best-balanced remuneration to keep an employee strongly committed while strengthening the company’s economic balance. You need to successfully value the employee’s work without increasing salary costs. Incentive compensation provides the necessary flexibility to maintain this balance. It does not replace fixed remuneration, but complements it.
The company gains in flexibility
An employee’s fixed salary is negotiated during recruitment and can never be reduced. As a result, to compensate for economic difficulties, a company has no room for manoeuvre to reduce its salary costs. By opting for an incentive compensation component, the company gives itself greater flexibility without becoming less competitive than other employers. As long as the remuneration package is attractive and the incentive component is only reduced if the company encounters difficulties due to weaker collective performance, it ensures it has a fallback position for tough times while remaining attractive to applicants.
The company reduces its employer costs
Certain incentive compensation schemes such as profit-sharing or employee savings schemes benefit from tax relief. This allows a company to offer consistent salaries and to supplement them with an incentive component that does not weigh on the remuneration package subject to employer costs.
The company adapts compensation to the actual performance of employees
Employees’ performance in companies is not necessarily constant. Bearing in mind that an employee’s salary is used to remunerate them according to how much value they create in their company, planning an incentive compensation system involves adapting to their performance to stay fair and consistent with their added value in the company.
2. Incentive compensation boosts employee commitment
According to the LinkedIn Global Talent Trends 2020 study, companies with high compensation and benefits see 56% fewer departures(LinkedIn Talent Solutions)
Remuneration is generally the main factor in attracting employees to a company. Its impact on employees’ professional and personal development therefore cannot be underestimated. However, incentive compensation allows each employee to take responsibility for their role in the company by establishing a contract of trust between the two: a fixed salary to ensure the need for security and to remunerate a level of qualification and skills; and incentive compensation to adjust to individual performance and value the quality of the work done on a daily basis.
Respond to the need for recognition in the company through incentive compensation
According to Maslow’s hierarchy of needs, recognition is essential for esteem. Incentive compensation is an effective and powerful way of showing this recognition to individual employees.
Moreover, incentive compensation systems do not just involve rewarding employees for achieving specific targets. An incentive compensation system can be based on qualitative rather than quantitative criteria, so that an employee’s performance is not limited to simply generating turnover. Incentive compensation is a way of showing appreciation to employees who help give direction to the company, while allowing it to innovate and stand out.
Make incentive compensation evolve with an employee’s career
Incentive compensation also helps set out an employee’s career development. A junior employee who joins a company and becomes more independent as they progress, taking on more and more responsibilities, can refer to the evolution of their incentive compensation component to measure the experience they have acquired and their personal development in the company.
Motivate and retain your employees with incentive compensation
The incentive compensation component helps maintain employee commitment and encourages them to stay loyal to their company. However, if it is not to be taken for granted, it must remain consistent with employee performance. The incentive component implies that you win some, you lose some. This is why a balance needs to be found between a fair fixed salary and an incentive component that is accessible but not necessarily systematic.
Top 5 des raisons de choisir un employeur - Employer brand research report 2021 - randstad.com
3. Incentive compensation meets the need for social equity
“We need to strike a balance between equity and efficiency. Too much social inequality creates great human drama, but too much entitlement perverts the system” – Peter Praet, former chief economist of the European Central Bank.
John Stacey Adams’s equity theory
In the 1960s, the philosopher John Stacey Adams thought up equity theory, according to which all employees compare their compensation based on the work they do, their colleagues’ pay (internal equity) and the pay in the labour market (external equity).
An imbalance in equity—when an employee believes they earn less than others—can make them want to rectify a situation considered unfair in three different ways: they either seek better income (within the company or elsewhere), limit their efforts and perform worse, or stop cooperating with another employee whose remuneration is perceived as ‘unfairly’ higher.
Conversely, when an employee believes their compensation to be fair or higher, they are more productive in the company.
Incentive compensation or how to adjust compensation for more equity
Incentive compensation provides a way of restoring this sense of fairness in a company: when an employee has shown greater productivity than their colleagues, they receive an individual bonus to reward their personal contribution, and if the company pays less than its other competitors in the job market, it adjusts the incentive component to retain its employees.
4. Incentive compensation aids recruitment
“To convince a hesitant applicant, knowing the incentive compensation system inside out can work in your favour” – Dalale Belhout, HR marketing and employer brand manager. (“How do you use incentive compensation to help recruitment?” – DigitalRecruiters)
Incentive compensation makes a compelling case for attractiveness. In a job market under pressure, companies having difficulty recruiting use incentive compensation to remain competitive and attract candidates.
Use incentive compensation to adapt to the candidate’s profile
There are many incentive compensation systems to choose from and they can be adapted to any candidate profile, from commission-based remuneration for sales staff to target-based bonuses for logistics or marketing staff, monetary bonuses to reward exemplary employees, and exceptional bonuses to react to crisis periods etc. For a candidate hesitating between two companies, the incentive component weighs in the balance. A company that knows how to use this recruitment argument to its advantage stands out.
Adapt to the job market with incentive compensation
The job market has changed and incentive compensation is becoming more and more common across the board. It is therefore becoming a more and more natural part of the selection criteria for candidates who know that incentive compensation is no longer just for certain profiles. Their individual expectations are adjusting as it becomes more widespread and if the company they are applying for does not offer an incentive component, they know the next one certainly will.
Know how to present a remuneration package transparently
When a company relies on incentive compensation to recruit, it still needs to be extremely transparent. It is no secret that a candidate who chooses a company because it has promised them a nice incentive component will not hesitate to criticise it on social media if it fails to keep its promises. You therefore need to know the company’s remuneration mix like the back of your hand when using incentive compensation to recruit.
