What are incentive systems?
In commercial organizations, economic incentive systems are key tools for guiding employee behavior, aligning individual goals with corporate objectives, and improving overall performance. The effectiveness of an incentive system depends not only on its structure, but also on its ability to motivate and sustain employees’ ongoing commitment. Among the various incentive models, the most common include commissions on turnover and bonuses linked to the achievement of specific objectives. This article explores both types of incentives, analyzing their advantages, challenges, and best practices.
Turnover commissions: a direct and transparent Incentive
The commission system on turnover is one of the most common incentive methods in commercial organizations, particularly in the sales sector. This approach involves paying a percentage of the turnover generated by the employee as part of their salary. The underlying logic is simple: the more sales an employee makes, the higher their remuneration will be.
Advantages of Turnover commissions
- Clarity and transparency: one of the main advantages of commissions on turnover is transparency. Employees know exactly how much they will earn for each sale made, which makes it easier to understand their earning prospects.
- Strong and direct motivation: commissions directly link individual performance to earnings, creating an intrinsic motivation to increase sales. This can lead to a significant increase in productivity.
- Alignment with Corporate objectives: when employees earn based on the turnover they generate, their personal goals naturally align with those of the company, namely turnover growth.
Challenges of turnover commissions
- Risk of opportunistic behavior: to direct the commercial structure towards corporate objectives and avoid excessively opportunistic behavior, the incentive model must take into account some fundamental elements such as:
- actual collection of invoices
- the discount applied
- the issuance of credit notes
- the possibility of further incentivizing product lines or customer clusters on which the company may choose to focus periodically
- Ineffectiveness in some contexts: commissions on turnover may not be effective in contexts where success does not depend solely on sales, but also on other factors such as customer satisfaction or teamwork.
Bonuses for achieving specific objectives: a flexible and strategic Incentive
In addition to commissions, many organizations adopt bonus systems linked to the achievement of specific objectives that cannot be measured by considering turnover alone. These goals can be individual, team, or company-wide, and range from increases in market share to improvements in customer satisfaction, to the implementation of new products or services.
Advantages of Objectives-Based Bonuses
- Flexibility and Customization: bonuses can be designed to reward a wide range of behaviors and outcomes, not just sales. This allows companies to incentivize not only the quantity but also the quality of work.
- Encouraging Positive Behaviors: bonuses can be used to incentivize specific behaviors that are strategically important to the organization, such as innovation, collaboration, ongoing training, or field activity.
- Reducing the Risk of Burnout: since bonuses are not necessarily tied to a single aspect of the job (such as sales), but can include a variety of goals, employees can find a better balance between productivity and personal well-being.
Challenges of Objectives-Based Bonuses
- Goal Setting: setting clear, measurable, and realistic goals can be complex. If goals are not well defined or are perceived as unattainable, bonuses can lose their motivational effect.
- Potential Misalignment: if individual goals are not aligned with the organization’s strategic objectives, bonuses can incentivize behaviors that do not truly contribute to business success.
- Risk of Internal Competition: in some cases, the use of bonuses for objectives can generate unhealthy internal competition, where employees are more focused on achieving their own bonus rather than collective success.
Best Practices for Designing Incentive Systems
A well-designed economic incentive system must fairly balance the needs of the company with those of the employees. Here are some best practices to consider:
- Integration of Different Incentive Models: companies can benefit from combining commissions on turnover with bonuses linked to the achievement of specific objectives. This integrated approach allows incentivizing both quantitative and qualitative performance.
- SMART Goals: the goals that determine the awarding of bonuses should be SMART (Specific, Measurable, Achievable, Relevant, and Time-bound). This ensures that goals are clear, achievable, and 1 aligned with business strategy.
- Continuous Feedback: an effective incentive system should be accompanied by continuous feedback. Employees need to know how they are progressing towards their goals and receive support to improve their performance.
- Periodic Review of the Incentive System: business and market needs change over time, so it is important that the incentive system is reviewed and adapted periodically to remain effective and relevant.
Blue BI Experience
The moment we are living in is characterized by the need for transparency and availability of information in real time or near real time.
Economic incentive systems are no exception. The employee needs to be able to transparently access their model, to constantly monitor the achievement of their objectives and the economic benefits that derive from them, as well as the actual payment of commissions and bonuses.
This entails the need for the company to equip itself with an application that allows, on the one hand, to define the incentive model of the individual employee in the most dynamic and parametric way possible and, on the other hand, to be able to automatically calculate skills and performance, giving visibility to the interested parties.
Blue BI has developed over time the skills that have allowed it to create, even for multinational companies operating in different business areas, highly configurable applications for the implementation of incentive systems based on a mix of commissions and bonuses, capable of receiving and supporting with minimal interventions the changing commercial strategies of our customers.
The projects we have implemented allow us to define commissions and bonuses considering multiple elements such as:
- configurable observation periods
- specific customer or product clusters
- the impact of the discount applied
- the actual collection of invoices
- the issuance of credit notes
- the dynamic definition of customizable objectives
During the design phase, our goal is to implement an application capable of supporting the current business strategy, while guaranteeing maximum openness to the future one.
We realize Business Intelligence & Advanced Analytics solutions to transform simple data into information of freat strategic value.
