What is Incentive Pay and How Does it Differ from Merit Pay?

by | May 29, 2023

What is Incentive Pay?

Incentive pay is wages or non-monetary rewards used to motivate or reward an employee’s work performance. Generally, incentive pay is used primarily in sales roles as a way to positively influence certain behaviors and actions from their team. However, many industries use incentive pay such as bonuses for non-sales staff in order to recognize specific accomplishments.

Incentive pay is usually connected to achieving goals in one way or another. This could be quota attainment, sales referrals, completing a project, or any other goal-oriented accomplishments. Incentives are typically given to employees in the form of wages, but some companies provide non-monetary incentives items like gifts, stock options, additional PTO, etc.

Types of Incentive Pay

As mentioned above, incentive pay can come in many forms; however, we’ll primarily be focusing on the wage-based and monetary types of incentive pay. These include commissions, bonuses, and spiffs.

Commissions: Commissions are a form of variable-pay remuneration for services rendered or products sold. Commissions are usually specific to sales people as a way to motivate and reward their efforts for selling products and services. Commissions can also be designed to encourage specific sales behaviors. Commissions can vary greatly between organizations and are often calculated based on specific variables included in the company’s operational and sales data.

Bonuses: Bonuses are a common way to motivate both sales and non-sales staff. Bonuses can be provided to team members for reaching predetermined goals during a month, quarter, or year. It differs from traditional commission in that it is not paid out upon a specific sale or customer payment, but is instead paid out in response to the accomplishment achieved. 

Spiffs: A sales performance incentive fund, also known as a spiff, is a temporary sales incentive strategy used to motivate sales reps to meet specific, short-term sales goals. It can also refer to an immediate commission for a sale. Similar to traditional sales contests, spiffs are often financial incentives, but companies can also opt to give away things such as prizes, vacations, or gift cards.
Man with a briefcase is given incentive pay in the form of cash from employer

Incentive Pay vs Merit Pay

Unlike incentive pay, merit pay is meant to act as a permanent, ongoing, and static income. While merit pay is also tied to an employee’s performance pay, merit pay is more closely related to an employee’s salary or regular wages. Criteria that helps determine the merit pay an employee receives includes the employee’s roles and responsibilities, set performance tiers, and the consideration of industry standards. It is common practice for companies to review the criteria for determining merit pay regularly during performance reviews.

Another difference between incentive pay and merit pay is that merit pay is purely an individual employee reward, whereas incentive pay can be pooled to reward individuals, teams, or even the entire company.

Both incentive pay and merit pay can act as motivators for employees, however, merit pay can be more effective as a long-term source of motivation among employees because it can have a dramatic impact on an employee’s income in the long-run. This can enable a consistent drive for employees to continually improve their performance so that they can receive a raise.

All employees have an equal opportunity to earn merit pay, but incentive pay may only be allocated to certain departments or roles within a company.

Managing Incentive Pay

Core’s customizable sales compensation application has all of the tools you need to accurately calculate any type of incentive-based pay for both your sales and non-sales staff. Additionally, our web-based application gives your employees complete visibility to the components of their incentive pay with access to our online portal.

Contact us or set up a free demo and we’ll show you how Core can automate incentive pay management for your business.

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