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The Role of Incentive Compensation in Employee Retention

Did you know that 36 percent of Americans are leaving their jobs due to inadequate compensation? This reason takes second place to a lack of opportunities for career advancement and development. Employee turnover has been on the rise in recent years, and employers are feeling the strain. 

It's important to find solutions that promote retention. How do you get your employees to stay? One part of your plan could be incentive compensation. 

What does that mean? Keep reading to learn more about how incentive compensation can help with employee retention. 


What Is Incentive Compensation?

Incentive compensation is a type of pay offered to employees in order to motivate them to achieve specific targets or objectives. It is typically used in sales and other productivity-based roles where employees can receive a bonus for meeting or exceeding quotas. Incentive compensation can also get used as a retention tool, offering employees additional pay if they stay with the company for a certain period of time.

When designing an incentive compensation plan, employers must carefully consider what types of goals or objectives they want to incentivize. They must also think about how much pay to offer and how often to make payments.

Too little pay may not be enough to motivate employees, while too much pay could create unrealistic expectations or encourage employees to take unnecessary risks. Employers must also consider whether their plan is fair and equitable, as well as how it will impact employee morale and motivation.


Do Compensation and Benefits Impact Employee Retention? 

Employee retention is impacted by many factors, compensation and benefits being two of the most important. Your employees need to feel like they are getting compensated fairly for the work they do and that their benefits meet their needs. When designing a compensation and benefits package, keep the following in mind:

  1. What are your employees' needs?
  2. What can you afford to offer?
  3. What do other businesses in your industry offer?

Your employees' needs should be at the forefront of your mind when designing a compensation and benefits package. Make sure you understand what they value most and design your package accordingly.

It's also important to be mindful of what you can afford to offer. You don't want to overpromise and then underdeliver. Finally, take a look at what other businesses in your industry are offering. This will give you a good benchmark for what is standard in your industry.


The Consequences of High Turnover Rates

Did you know that it costs 33 percent of a worker's annual salary to replace them if they leave? 

The consequences of high turnover rates are far-reaching and can be extremely costly for businesses. Not only does it mean that businesses have to constantly train new employees, but it also disrupts productivity and can lead to a loss in morale among the remaining staff.

High turnover rates have a significant impact on the morale within an organization. The employees who remain with the organization feel overworked and undervalued.

They see their colleagues leave and wonder if they will be next. This creates a feeling of insecurity which leads to lower morale. In addition, high turnover rates make it difficult to build trust and teamwork.

In some cases, high turnover can even indicate larger issues within the company, such as a lack of good management or poor working conditions. Whatever the cause, high turnover rates should be a cause for concern for any business.


How Does Incentive Compensation Impact Employee Retention?

Incentive compensation can have a positive or negative effect on employee retention. The type of incentive, the amount of the incentive, and how the incentive is structured all play a role in determining its impact.

Employee Retention

Incentives that are directly tied to employee performance can have a positive impact on retention. When employees feel that their hard work is rewarded, they are more likely to stay with the company. These types of incentives also foster a sense of competition and motivation among employees.

Increased Job Satisfaction

Incentives that are properly structured and that are based on employee performance can lead to increased job satisfaction. Benefits and compensation play a role in job satisfaction. If an employee feels like they are being compensated fairly for the work they do and that their benefits meet their needs, they are more likely to experience job satisfaction.

Increased Productivity

Incentives can lead to increased productivity. When employees feel that their hard work is being rewarded, they are more likely to be motivated to work harder. 

Sense of Ownership and Pride in the Company

Incentives can lead to a sense of ownership and pride in the company. When employees feel that their hard work is getting rewarded, they are more likely to feel a sense of ownership in the company. 

Increased Risk of Burnout

Incentives that are not properly structured or that are not based on employee performance can have a negative impact on retention. These types of incentives can lead to increased stress and pressure on employees, which can eventually lead to burnout. Employees may also feel that they are not fairly compensated for their work, which can lead to frustration and dissatisfaction.


How to Implement an Incentive Compensation Plan

When it comes to employee retention, incentive compensation can play a major role. By offering employees financial incentives for meeting or exceeding performance goals, employers can encourage them to stay with the company.

Implementing an incentive compensation plan is not always easy, but there are a few things you can do to make it successful. First, you need to identify the performance goals that you want your employees to meet. These goals should be specific, measurable, and achievable.

Next, you need to determine how you will reward employees for meeting these goals. This could include giving them bonuses, raises, or other types of rewards. Finally, you need to communicate the plan to your employees and make sure they understand what is expected of them.

If you follow these steps, you can create an incentive compensation plan that will help retain your best employees.


Compensation System Best Practices

In order to retain employees, it is important to have a well-designed compensation system in place. There are a few best practices that should get followed when designing a compensation system. 

Make Sure the System Is Fair

It is important to make sure that the compensation system is fair. Employees should get paid based on their skills, experience, and performance. The system should not favor one type of employee over another.

Make Sure the System Is Simple

The compensation system should be simple and easy to understand. Employees should not have to guess how much they will get paid for their work. The system should be transparent and easy to follow.

Make Sure the System Is Flexible

The compensation system should be flexible so that it can be adjusted as needed. The system should be able to accommodate changes in the workforce, such as promotions and demotions.

Make Sure the System Is Competitive

The compensation system should be competitive so that employees are paid what they are worth. The system should get designed to attract and retain high-quality employees.

Align Compensation With Company Goals

The compensation system should be aligned with the company's goals. The system should reward employees who help the company achieve its goals.

Consider Employee Needs

When designing the compensation system, it is important to consider the needs of employees. The system should meet the needs of employees, such as providing a livable wage and fair pay for overtime work.

Communicate Clearly

The compensation system should be clearly communicated to employees. Employees should know how the system works and how their pay will be determined.

Review the System Regularly

The compensation system should get reviewed on a regular basis. The system should get updated as needed to ensure that it is fair, simple, flexible, and competitive.


Make Incentive Compensation Easy

Incentive compensation can play a big role in employee retention, especially for high-performing employees. By offering employees a financial incentive to stay with the company, employers can keep their best talent from leaving for greener pastures.

However, it's important to note that incentive compensation is just one tool in the employee retention toolkit; other factors, such as company culture, work-life balance, and career development opportunities, are also important.

Are you ready to start implementing incentive compensation in your workplace? Kinitro has everything you need for team incentive plans. We'll help you build, manage, and automate commission payout. 

Request a demo today.