Incentive pay strategies: a step-by-step guide for small business owners

Forget the notion that you can’t rush someone who gets paid by the hour, because incentive pay has the remarkable ability to fuel motivation like nothing else. Imagine walking into your workplace and witnessing your team effortlessly driving sales and delivering exceptional customer service, all driven by their unwavering commitment to achieving their goals.

While it may sound like a dream, it can be your reality with the right incentive pay program.

But what is incentive pay, and how can you use it to motivate your hourly team to go above and beyond? Well, that’s exactly what we’ll cover in this blog.

You’ll learn all about the different types of incentive programs, their pros and cons, and how to create an incentive program of your own. We’ll even explore a few industry-specific incentive pay examples and teach you how to easily incorporate payouts with your regular payroll process.

So, if you’re ready to boost employee productivity, drive sales, and improve the performance of your business, let’s get to it!

What is incentive pay?

Incentive pay refers to a compensation system that financially rewards employees for meeting specific goals, sales targets, or overall performance metrics. This means instead of a fixed salary or hourly wage, employees can earn additional income based on their performance.

According to research conducted by the Harvard Business Review, companies that use target-based incentive programs experienced an average revenue growth of 44%. With these results in mind, small businesses have begun implementing incentive programs to inspire employee performance and enhance revenue generation.

Different types of incentive pay programs

To effectively motivate your team, it’s crucial to understand the various types of incentive programs available. By exploring these different options, you can identify the program that aligns best with your team’s dynamics and business objectives, ensuring optimal motivation and success.

Pay for performance

Boosting performance and getting rewarded for it — that’s what performance pay is all about! This approach ignites motivation, leading to increased productivity, top-notch work quality, and outstanding service. By linking incentives to sales, customer satisfaction, productivity, or work quality, you can inspire your team to perform their best and enjoy the rewards that come with it.

Group incentives

Group incentive programs celebrate the power of teamwork and reward collaboration. When your employees are united by a common goal and the promise of exciting rewards, they are more likely to support one another in the workplace. This promotes a sense of camaraderie, boosts productivity, and can even improve job satisfaction. Much like personal pay for performance incentives, group incentives can be based on sales targets, customer service, productivity goals, or quality assurance initiatives.

Retention bonuses

Employee turnover is one of the biggest challenges service-based businesses face, particularly in the restaurant industry. Not only is it inconvenient to replace an employee, but it’s expensive too—costing you up to two times their annual salary. To avoid these turnover costs and reward employee loyalty, small businesses are turning to retention-based incentive programs. These bonuses can be based on job performance, reaching certain milestones, or provided on an annual basis. Think of them as a way to (financially) thank your team for sticking around and contributing to your company’s long-term success.

Commission-based incentives

Imagine if your hard work directly translated into more cash in your pocket. That’s the power of commission-based incentives for retail and sales-focused roles. These incentives light a fire within hourly employees by tying their earnings to their sales performance. The more they sell, the more they earn. Whether it’s a percentage of sales, tiered commission structure, or special bonuses for hitting targets, these programs will bring out your employees’ inner sales superstar.

Non-monetary incentives

While monetary rewards are the most obvious way to motivate your employees, it doesn’t always have to be about money. Non-monetary incentives can provide recognition, personal growth opportunities, and work-life balance. Think of “Employee of the Month” programs, flexible scheduling options, or skill development workshops. With non-monetary incentives, the possibilities are endless, and the impact on employee morale and satisfaction is priceless!

The pros and cons of incentive pay for hourly employees

Incentive pay for hourly employees can be a game-changer for motivation and overall productivity. But like any strategy, it has specific upsides and downsides that warrant consideration. So, let’s dive into the pros and cons of incentive pay, exploring how it can fuel success while keeping an eye on potential challenges.

Pro: Increased job performance

While car salespeople may get a bad rap for doing whatever it takes to make a sale, you’ve got to applaud their work ethic. In general, people in sales roles are some of the hardest workers out there, and for good reason. Their compensation is directly tied to how much they sell. Just take a moment to consider how that would affect your own job performance and it’s easy to see why incentive programs increase job performance by an average of 22%.

Pro: Improved employee retention and job satisfaction

​​With so many industries facing chronic understaffing issues, employee retention has become a major concern. Although some companies have adopted an “always hiring” policy to prevent understaffing, it’s actually easier and more cost-effective to keep your existing employees. Considering nearly 40% of employees stay with their employer because of their salary and bonuses, creating an attractive incentive program could be the key to retaining your top talent.

Pro: Goal alignment

As a small business owner, it can be difficult to get your employees to buy into your overarching organizational objectives. Incentive programs help align employee goals with these objectives by linking their compensation with activities that directly contribute to the success of your company.

Con: Increased job pressure

While good-intentioned, incentive pay programs can inadvertently create a stressful work environment that damages employee morale. This is particularly true when companies set sales targets or productivity goals that are too difficult to achieve. Unfortunately, group incentives can intensify matters even further as lower-performing employees struggle to keep up with their high-performing colleagues. This is why incentive programs need to be designed with your company and employee culture in mind to be successful.

Con: Complicated administration

Regardless of how you decide to set up your incentive pay program, it’ll require additional paperwork. Tracking employee progress and creating a new payout process can be a complicated addition to your existing payroll structure. And that doesn’t even take into account the time spent establishing attainable goals and metrics. So while incentive programs can be incredibly beneficial, without flexible payroll software, the additional administration can be taxing.

Con: Unintended consequences

By nature, incentive programs create a more competitive work environment that can have unintended consequences. As your team strives to meet their objectives, they may adopt unethical behaviors or shortcuts that compromise their quality of work. Unfortunately, this can negatively impact customer service and even harm the reputation of your business.

How to create an incentive program for employees

Creating an effective incentive program for employees requires careful planning and consideration. These steps will help you design a program that’s tailored to your team’s unique needs, ensuring maximum impact and success.

Step 1: Start with clear objectives

Define the ultimate goal of your incentive program. Do you want to increase sales, provide exceptional customer service, or increase productivity? Determine the specific behavior you want to incentivize and ensure it aligns with your overarching organizational objectives before moving forward.

Step 2: Identify specific performance metrics

Once you’ve clearly defined your objectives, you’ll need to identify objective and measurable metrics that will be used to measure employee performance. This can include sales targets, productivity levels, or customer satisfaction levels. Remember, these performance metrics should directly relate to the desired outcome to be effective. Set SMART goals to ensure you’re setting yourself—and your team—up for success.

Step 3: Define eligibility criteria

It’s important to note that your incentive program likely won’t be relevant to your entire company. For instance, your back-of-house team won’t be able to directly affect a group sales target like your front-of-house team can. By clearly defining eligibility criteria from the start, you can ensure only those who are eligible for the incentive program partake in it and avoid undue disappointment. Eligibility criteria can include things like job titles, tenure, or performance benchmarks.

Step 4: Identify incentive structure

Once you’ve defined your objectives, performance metrics, and eligibility requirements, you can determine the type of incentive you’ll be offering and how it’ll be rewarded. Remember to take into consideration your budget and the types of rewards that will be meaningful to your team. This can include performance-based bonuses, commission structures, or gifted vacation days.

Step 5: Communicate the new incentive program with your team

After carefully planning and structuring your incentive program, it’s time to share it with your team. Explain the program in detail, including your objectives, eligibility requirements, performance metrics, and evaluation and payout process. Be sure to answer any questions and reinforce how their effort will be rewarded. If it’s an ongoing program, include it in your welcome packet for new hires. It should be part of your overall HR and onboarding package.

Step 6: Track and measure performance

Use the incentive structure you created to track and measure employee performance based on the metrics you established in Step 2. To ensure fairness and transparency, it’s best to regularly share your reports with your team. Aalways address any inconsistencies or employee concerns directly, to maintain your team’s participation in the program.

Step 7: Gather employee feedback

No matter how carefully you plan out your incentive program, chances are it won’t be perfect. Unless you’ve recently worked in the same role as your employees, you won’t have the same point of view as they do. So, be open to their feedback, analyze your performance metrics, and make the adjustments necessary to improve the program’s effectiveness.

Step 8: Provide regular updates

To maintain transparency and keep your team engaged, provide regular updates on their progress toward incentive goals. Don’t forget to schedule individual check-ins to provide feedback and help your team reach their personal performance goals too. Plus, have fun! Keep momentum going by communicating small and big wins via a team communication app where everyone can cheer on their coworkers.

Step 9: Distribute incentives or awards

This is the most important step: be true to your word. Even if the program didn’t go as planned, you have to distribute the incentives or awards that were promised. Otherwise, you risk damaging employee trust, which will negatively impact their performance and may even increase turnover. That’s just not a risk worth taking. So, be sure to distribute accurate incentive payouts on time to maintain the trust and engagement you worked so hard to build.

Step 10: Monitor and share results

To keep tabs on the effectiveness of the program and promote engagement, continuously monitor the program’s outcomes and share the results with your employees. By highlighting specific success stories, calling out top performers, and celebrating group achievements you can reinforce a culture of performance.

Incentive pay examples to help inspire your incentive program

Now, creating incentive pay programs will be more straightforward in some industries than others. So, here are two industry-specific examples to help inspire your own incentive program.

Example 1: A quality assurance program for cleaning services

Let’s say a cleaning service company wants to create an incentive pay program to encourage high-quality service and customer satisfaction. That’s the program objective, but what additional steps do they need to take to put that into action? Well, let’s find out!

• Establish quality benchmarks: To achieve their objective of high-quality service and customer satisfaction, they’ll establish quality benchmarks based on customer reviews, cleanliness ratings, and routine company inspections.
• Define eligibility: Since these metrics are directly related to the cleaning service itself, all cleaning staff will be eligible to participate.
• Create incentive structure: Individuals or teams that consistently meet or exceed the quality benchmarks mentioned above will receive monthly monetary bonuses or additional paid time off.
• Conduct Inspections: Managers will carry out routine inspections to assess cleaning quality and client feedback will be obtained through satisfaction surveys.
• Provide feedback: Using the information obtained through inspections and customer surveys, managers will provide employees with ongoing feedback. They’ll identify areas of improvement, and provide additional training or coaching where necessary.
• Monitor program success: The cleaning service company will continuously evaluate how the program has impacted service quality and customer satisfaction. Adjustments will be made to improve its success.

Example 2: Sales incentive program for a retail store

For this example, let’s imagine a retail store creates a sales incentive program to boost sales during the holiday season. Now, let’s see how they create a sales incentive program that makes that happen.

• • Identify performance metrics: To measure the sales performance of their team, the retail store will use metrics such as total sales, sales targets, and upselling statistics.
  • Eligibility criteria: Since all the metrics listed above relate to sales, the program will only include sales associates.
  • Incentive structure: The store manager decides to use a tiered rewards system that provides a fixed bonus for reaching a specific sales target. Employees who surpass the target will receive an additional bonus based on a percentage of their total sales (also known as commission).
  • Track and measure performance: To track performance, the store manager will use specialized software that records individual sales data and calculates the incentive payouts accordingly.
  • Routine performance reviews: The store manager will provide routine performance reviews and recognize high-performers in team meetings.
  • Incentive payouts: At the end of each month, each employee’s total sales will be calculated to determine incentive payouts, which will be paid as individual bonuses rather than added to employee paychecks.
  • Celebrate individual and team success: To boost morale and motivation, the store will hold routine celebrations to share overall program results and highlight top performers.

Both of these incentive programs provide tangible ​​rewards based on performance. They encourage their teams to provide exceptional customer service, drive revenue, and go the extra mile.

Keep your payroll process simple, even with an employee incentive program

Despite all the productivity and performance benefits that incentive programs have to offer, many small businesses choose to forgo them to avoid payroll complications. Now, as annoying as paperwork can be, it shouldn’t stand in your way of creating programs that improve your business.

Luckily, Homebase makes payroll a piece of cake, even when certain employees deserve an extra slice. Here’s how we do it:

Easily run separate payroll

With Homebase payroll, it’s easy to run a separate payroll for bonuses or off-cycle payments. This ensures your team members receive their bonus on a separate check, which feels a bit more special than adding it to their regular paycheck. Worried about tax complications? Don’t be. In addition to regular payroll taxes, Homebase automatically withholds income tax for all supplemental pay, so you don’t have to do any extra math.

Include employee bonuses in regular payroll

This method allows you to include employee bonuses in the regular payroll while identifying them separately. The intuitive interface easily adds bonuses for each team member and ensures accurate calculations. Homebase even automatically withholds the appropriate amount of taxes from both the regular pay and the bonus, to make a complicated matter simple.

Save time on payroll, no matter how complicated it gets!

Even if you’re using incentive pay, Homebase makes it easy to catch errors, pay your team, and file taxes all in one place. Simplify payroll with Homebase today.

Incentive pay FAQs

How does incentive pay work?

Incentive pay works by financially rewarding employees based on their performance. By providing employees with the opportunity to earn additional pay beyond their regular wages, businesses can align employee efforts with their organizational objectives and improve business performance.

What are the benefits of an incentive program as a small business owner?

Incentive programs provide many benefits for small business owners such as enhanced employee productivity and performance, improved retention, and organizational goal alignment.

How can you create an incentive program for hourly employees?

Creating an incentive program for hourly employees starts with setting a clear objective or goal. With your objective in mind, you can then identify relevant performance metrics, determine which employees are eligible, and design the incentive structure. Then, you’ll need to communicate the purpose of the program to your team, how their performance will be tracked, and how awards will be distributed. From there, it’s a matter of continuous evaluation,  feedback, and recognition to drive performance outcomes.