What is incentive in salary?

Incentives in the context of salary in India, generally refers to additional compensation that is designed to motivate and reward employees for exceeding certain performance goals or metrics. Incentives are mostly monetary in nature.

What are the types of incentives a company can offer its employee?

Here are some common types of incentives in India:

Performance bonus

An extra amount paid for hitting specific targets or achieving certain metrics, which can be individual, departmental, or company-wide.

Sales commission

For roles primarily involved in sales, a commission is often paid as a percentage of the revenue generated.

Profit-sharing

Some companies offer a share in profits to their employees, typically distributed annually.

Variable pay

Besides fixed components like basic, dearness allowance, and house rent allowance, some companies have a variable pay component that depends on both the individual's and the company’s performance.

Sign-on bonuses

A one-time bonus given upon joining the company, usually to highly skilled employees.

Retention bonuses

These are paid to employees to stay with the organization for a certain period, usually during crucial projects or times of organizational change.

Project bonuses

One-time incentives awarded for the successful completion of a particularly challenging or important project.

Stock options

Companies offer stock options (ESOPs) to senior management and key personnel who achieve targets

Incentive pay structure

The common incentive pay structures are as following:

Criteria	Causal Incentives	Structured Incentives
Definition	Rewards given informally based on spur-of-the-moment decisions or immediate performance indicators.	Rewards are formalized and systematic, usually predefined and documented as part of an employment contract or company policy.
Basis	Generally based on ad-hoc assessment or immediate results.	Typically based on established metrics, KPIs, or objectives.
Frequency	Random, unpredictable.	Regular intervals, such as monthly, quarterly, or annually.
Transparency	May lack transparency as they are not systematically defined.	Usually transparent, as employees are aware of the criteria needed to earn the incentive.
Consistency	Can be inconsistent due to the subjective nature of assessment.	More consistent because they are typically based on specific, quantifiable metrics.
Equity	Risk of perceived or actual inequity among employees.	Designed to be equitable, assuming the metrics are fair and unbiased.
Employee Motivation	May boost immediate motivation but can also lead to uncertainty.	Generally better for long-term planning and sustained motivation.
Examples	Spot bonuses for good performance on a particular day or project.	Sales commission, performance bonuses based on end-of-year reviews, stock options.
Risk	Risk of favoritism or inadvertent exclusion of deserving employees.	Risk of metrics not perfectly capturing employee value, but generally less risky than causal incentives.

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In general, structured incentives or variable pay make up 30% or less of the total compensation.

According to an article by EY, In 2022, the typical variable compensation made up 15.6% of the total pay package, showing an increase from the 14% observed in 2021. The banking sector recorded the most significant proportion of performance-based rewards, constituting 25.5% of overall compensation. On the other hand, the telecom industry had a comparatively modest variable pay component, accounting for just 13.7% of total remuneration, which was lower than most other industries.

When designing incentive pay structure for employees, it is important to understand the market standards for your sector and your competitors offerings. When your incentive pay structure doesn't meet the market benchmark, it can lead to voluntary employee attrition.

Read: Fixed comp and variable comp structure