An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees and in sales to attract and retain customers. Scientific literature also refers to this concept as pay for performance.
Types
Employee
Employee incentive programs are programs used to increase overall employee performance. While employees tend to approve of incentive programs, only 27% of companies have such programs in place. Employee programs are often used to reduce turnover, boost morale and loyalty, improve employee wellness and safety, increase retention, and drive daily employee performance.
Consumer
Consumer incentive programs are programs targeting the customers of an organization. Increases in a company's customer retention rate as low as 5% tend to increase profits by 25%-125%. Consumer programs are becoming more widely used as more companies realize that existing customers cost less to reach, cost less to sell, are less vulnerable to attacks from the competition, and buy more over the long term.
Points programs
Points-based incentive programs are a type of program where participants collect and redeem points for rewards. Points programs may be used to incentivize both employees and consumers. Depending on the program type and the organizational objectives, points can be awarded on a number of criteria including positive employee behavior, the demonstration of organizational values, repeat customer purchases, the sale of new products, increased overall sales, or even the use of proper safety precautions. In addition to point awarding, the levels at which points can be redeemed can be customized by the organization. Points programs are a way for organizations to motivate behavior over time while improving the organizations’ overall performance. Loyalty programs are a frequently used points-based incentive program in which customers who exhibit a certain behavior are rewarded with points, reinforcing that behavior.
Sales
These programs are primarily used to drive sales, reduce sales costs, increase profitability, develop new territory, and enhance margins. Sales incentive programs have the most direct relationship to outcomes. A sales incentive plan (SIP) is a business tool used to motivate and compensate a sales professional or sales agent to meet goals or metrics over a specific period of time, usually broken into a plan for a fiscal quarter or fiscal year. An SIP is very similar to a commission plan; however, an SIP can incorporate sales metrics other than goods sold (or value of goods sold), which is traditionally how a commission plan is derived. Sales metrics used in an SIP are typically in the form of sales quotas (sometimes referred to as point of sale or POS shipments), new business opportunities and/or management by objectives (MBOs) independent action of the sales professional and are usually used in conjunction with a base salary.
SIPs are used to incent sales professionals where total sales are not a precise measure of sales productivity. This is usually due to the complexity or length of the sales process or where a sale is completed not by an individual but by a team of people, each contributing unique skills to the sales process. SIPs are used to encourage and compensate each member of the sales team as they contribute to the team's ability to sell. It is not uncommon for the members of such teams to be located in different physical locations and for the product introduction to happen in one location and the purchase of such a product to occur in another location.
Dealer
Dealer incentive programs are used to improve performance for dealer, resellers, channel partners and other types of brokers using sales incentive programs. These programs help companies capture market share, launch new products, reduce cost of sales and provide momentum for new launches by incenting an external party to drive additional sales.