12 Types of Incentive Compensation That Actually Work

Introduction 

You’re doing everything right, hiring strong sellers, setting ambitious targets, and tweaking comp plans every few quarters to keep up with shifting priorities. But then the top performer quits.

Not because of the quota. Not because of the product. Because the incentive programs stopped making sense.

Maybe you’ve been there. One rep sees huge upside with accelerators, while another barely understands how their payout was calculated. Finance wants predictability. Sales wants the reward. 

And somewhere in between, your operations team is stuck managing exceptions and answering Slack messages that start with “Quick question about my comp…”

Here’s the catch: most teams don’t need more complexity. They need clarity on the types of incentive compensation that actually work and how to use them.

This guide walks you through the most effective types of incentive compensation plans that SaaS and B2B companies use today. Whether you’re building your first comp model or refining an existing one, this will help you make smarter decisions and build trust across your entire go-to-market team.

Why Understanding Incentive Compensation Types Matters

Incentive compensation is a performance-based pay structure designed to reward employees for achieving specific goals that align with company objectives. Unlike fixed salaries, it ties earnings to outcomes. Common forms of incentive compensation include commission-based pay, milestone bonuses, profit-sharing, and equity-based rewards.

Most companies rely on just one or two levers, typically commissions or bonuses, across the board. But what motivates a sales rep won’t necessarily move a developer, a CX leader, or a cross-functional product team. That’s why understanding the range of incentive compensation types is critical.

Here’s why it matters:

1. Aligns Pay with Performance

Fixed salaries reward presence. Incentives reward impact. When compensation is tied to employee performance metrics like revenue growth, retention, or delivery speed, people know exactly what success looks like and how they’re rewarded for driving it.

2. Boosts Motivation and Retention

Not everyone is driven by the same rewards. For some, it’s about monetary rewards. For others, it’s ownership, recognition, or team wins. Understanding different incentive types helps you tap into those motivations and consistently reward high performance across different teams.

3. Reduces Fixed Salary Burden

Incentives allow you to scale rewards with business results. Instead of locking into high salaries, you create variable plans that reward performance without overextending your budget, especially useful in early-stage or cash-conscious environments.

4. Customizable by Team, Role, or Stage

Sales, engineering, and customer success don’t operate or think the same way. Neither should their incentive plans. By learning the range of incentive types, you can tailor rewards to what drives each team, based on their function and maturity.

5. Drives Measurable Impact

Companies that implement structured incentive plans see an average 22% boost in productivity, according to the Incentive Research Foundation. That’s not just a nice-to-have; it’s proof that the right incentive structure fuels real business results.

12 Common Types of Incentive Compensation Plans 

There’s no single incentive plan that works for everyone. What motivates a quota-carrying sales rep won’t land the same way for a backend engineer or a customer success lead. That’s why building a strong incentive structure starts with knowing your options.

Below are 12 of the most widely used incentive compensation plans.

1. Commission-Based Incentives

Commission-based pay is one of the most widely used incentive structures, especially in sales. It’s a performance-tied payout model where employees earn a percentage of the revenue they generate. This model drives accountability and rewards high-output behavior, making it ideal for roles where results are directly measurable.

Best For: Sales teams, business development reps, channel partners

2. Profit-Sharing Plans

Profit-sharing is a company-wide incentive where a portion of the firm’s profits is distributed among employees,  typically as a percentage of salary or a fixed amount.. Payouts are usually made quarterly or annually, based on predefined profit thresholds or formulas. It creates a sense of shared ownership and rewards everyone for collective success, regardless of role.

Best For: Mature companies, flat orgs, services, and retail businesses

3. Gainsharing

Gainsharing rewards employees for improvements in productivity, quality, or operational efficiency. Unlike profit-sharing, it’s based on performance gains within a team or department, like reducing errors or boosting output. Baselines are set using historical performance data, and gains are measured against these benchmarks. The resulting savings or improvements are then shared with the team..

Best For: Manufacturing, operations, logistics, customer service

4. Spot Bonuses

Spot bonuses are one-time, immediate rewards given for specific achievements or behaviors, like resolving a customer crisis, stepping up during a crunch period, or exceeding expectations on a key project. They’re unplanned in budgets but highly effective for reinforcing positive behaviors in the moment.

Best For: Ad-hoc recognition across all teams; culture-first companies

5. Sales Incentive Plans (SIPs)

Sales incentive plans are structured programs with pre-set quotas, accelerators, and payout curves. Unlike standard commissions, SIPs often include bonuses for surpassing stretch goals, bringing in strategic accounts, or maintaining margin discipline. They're designed to align sales behaviors with broader company goals, like revenue consistency or upsell growth.

Best For: Account executives, quota-carrying reps, sales leadership

6. Goal-Based Bonuses

These bonuses are tied to achieving specific goals, usually based on OKRs (Objectives and Key Results) or KPIs. In fact, a recent WorldatWork report highlights that 98% of organizations now use some form of bonus program, with 81% utilizing performance bonuses to drive such goal-based outcomes. Unlike sales-focused plans, goal-based bonuses apply across functions and are structured to reward impact in areas like marketing, operations, or product development.

Best For: Marketing, growth, product, HR, and operations teams

7. Long-Term Incentive Plans (LTIPs)

Long-Term Incentive Plans (LTIPs) are designed to retain top talent by offering future-aligned financial rewards based on long-term success metrics. These plans typically span 2–5 years and are tied to metrics like EBITDA, stock price, or market share. LTIPs often include vesting schedules with 1-year cliffs and gradual monthly or annual vesting thereafter, ensuring sustained contribution over time. Commonly used for executives or strategic hires.

Best For: Executive leadership, strategic hires, and succession candidates

8. Stock Options & Equity-Based Plans

Equity-based incentives grant employees ownership in the company, typically through individual stock options or RSUs (Restricted Stock Units). ESOPs (Employee Stock Ownership Plans), on the other hand, are company-wide programs that allocate shares to employees collectively. These plans foster long-term commitment and are especially common in startups that need to conserve cash while still offering meaningful compensation. 

Best For: Startups, tech companies, product and engineering teams, senior hires

9. Milestone-Based Bonuses

These bonuses are tied to completing significant project phases, like a product release, infrastructure rollout, or compliance certification. Milestone-based incentives are great for motivating cross-functional teams working toward time-bound deliverables.

Best For: Product, engineering, R&D, IT, and implementation teams

10. Team-Based Incentives

Team-based incentives reward collective performance rather than individual output. These plans drive collaboration, reduce internal competition, and encourage shared accountability across roles. The reward, such as a cash bonus, pooled equity, or even a team offsite, is distributed among the group based on team outcomes.

Best For: Agile teams, cross-functional squads, collaborative work environments

11. Non-Monetary Incentives

Not all motivation comes from money. Non-monetary incentives include public recognition, flexible schedules, wellness benefits, extra time off, or team experiences. When implemented intentionally, these perks can be just as powerful, especially for teams driven by culture, meaning, or lifestyle.

Best For: Culture-driven organizations, early-stage teams, people-first environments

12. Management by Objectives (MBO) Plans

MBOs are incentive structures that tie compensation to individual or team-defined goals. Unlike rigid KPIs, MBOs offer more flexibility, allowing managers and contributors to co-create targets based on role-specific priorities. They’re especially effective when outcomes aren’t purely revenue-based.

Best For: Customer success teams, mid-level managers, operational roles

Comparison Table: Types of Incentive Compensation Plans

Here’s the Comparison Table for the 12 types of incentive compensation plans.

Steps to Design an Effective Incentive Compensation Plan

Knowing the types of incentive compensation is only useful if you know how to put them into action. Whether you're building a plan from scratch or refining an existing one, these steps will help you build a strong foundation for incentive compensation management that motivates performance and drives results.

Step 1: Set Clear Business Objectives

Your incentive plan should tie directly to what the business is trying to achieve, not just generic outputs. Start by identifying the outcomes that matter most right now.

Do this now:

• Write down your top 3 business priorities (e.g., revenue growth, churn reduction, faster delivery).
• Identify which teams influence each of those priorities directly.
• Flag areas where incentives could help accelerate progress toward these goals.

Step 2: Define Measurable Performance Indicators

Incentives only work when they're tied to metrics that are trackable, relevant, and within the employee’s control.

Do this now:

• List the core KPIs for each team (e.g., ARR for sales, MQLs for marketing, NPS for customer success).
• Ensure each metric is measurable monthly or quarterly, not just annually.
• Eliminate any metric that doesn’t tie to a business outcome.

Step 3: Segment Employees by Role or Function

One-size-fits-all plans lead to disengagement. Different teams need different incentives based on how they contribute value.

Do this now:

• Map every major role to its primary value driver (e.g., Sales → revenue; Engineering → delivery timelines).
• Categorize roles by function: output-driven, quality-driven, or influence-driven.
• Create a simple matrix showing which incentive types fit each group best.

Step 4: Align Rewards with Outcomes

The reward should match the result. Monetary incentives for performance, perks, or recognition for behavior or culture alignment.

Do this now:

• Assign monetary incentives to direct performance roles (sales, ops).
• Use non-monetary incentives (recognition, flexibility) for retention or collaboration.
• Add a “why it matters” line to each incentive so teams understand the business logic.

Step 5: Establish Plan Governance

Incentive plans need clear ownership. Otherwise, they get outdated, misused, or misunderstood. Without clear ownership, employee incentive plans can drift from their original intent and lose impact.

Do this now:

• Assign one person/team to own the incentive design and updates.
• Document a basic review cadence (e.g., quarterly review, annual overhaul).
• Create a dispute resolution process that’s quick, neutral, and consistent.

Step 6: Communicate the Plan Clearly

Even the most well-designed incentive compensation plan will fail if employees don’t understand how it works. Miscommunication leads to confusion, mistrust, and disengagement, all of which undermine the plan’s intended impact.

Do this now:

• Create a one-pager or deck that explains each team’s plan in plain language.
• Host a Q&A session post-launch to address concerns or confusion.
• Use a real example (from last quarter or year) to show how the payout would have worked.

Step 7: Monitor & Adjust

No plan is perfect out of the gate. Even the most thoughtful incentive program will need fine-tuning once it’s live. Business priorities shift. Teams grow. Market conditions change. That’s why your compensation strategy should never be a one-and-done document; it should be a living system.

Do this now:

• Track plan performance against intended outcomes (e.g., did quota attainment go up?).
• Run quarterly feedback surveys or 1:1s with managers.
• Document lessons learned and keep an incentive plan “changelog” for visibility.

Key Criteria to Evaluate Incentive Plan Effectiveness

Before locking in any incentive structure, pressure-test it against the five criteria below. A plan might look great on paper, but if it fails in any of these areas, it could backfire fast.

1. Alignment with Business Goals

Does the plan directly support a strategic priority? For example, if you’re focused on reducing churn, your incentives should reward retention, not just acquisition. Every payout should move the business in a measurable direction.

2. Behavioral Impact

Will the plan drive the right behaviors? If a sales rep can game a commission structure to close low-quality deals, that’s a problem. Incentives should reward not just outcomes, but the kind of performance that’s sustainable and brand-aligned.

3. Clarity and Simplicity

If an employee needs a spreadsheet and a calculator to understand their payout, your plan is too complex. Confusion kills motivation. Every team member should know exactly how they can earn more and what it takes to get there.

4. Financial Sustainability

Can your business afford the plan, both in boom cycles and slow quarters? Incentives should scale with results, not break your budget. A good rule: model best-case payout scenarios before rollout.

5. Perceived Fairness

Even the best-designed plans can fail if employees view them as unfair. Are high-impact roles being recognized proportionally? Are team-based bonuses being distributed transparently? Fairness drives both adoption and morale.

How to Choose the Right Incentive Compensation Type for Your Business

With 12 strong options on the table, the real challenge isn’t knowing what’s out there, it’s knowing what works best for your business, team structure, and growth stage. Here’s a step-by-step framework to help you make the right call:

Step 1: Align with Business Goals and Role Impact

Start by identifying the outcomes your business is driving toward, whether that’s revenue growth, retention, faster shipping cycles, or operational efficiency. Then map those priorities to each role’s contribution.

• Sales teams → Commission plans or SIPs tied to quota
• Customer success → MBOs or bonuses linked to renewals and NPS
• Engineering/product → Milestone bonuses or LTIPs based on delivery and innovation

Incentives should reinforce what matters most.

Step 2: Factor in Company Stage and Budget

Your financial maturity shapes what you can realistically offer. Early-stage startups often lean on equity or milestone bonuses to conserve cash while still rewarding performance. In contrast, enterprise orgs can afford layered plans like mixing short-term cash bonuses with long-term equity grants.

Keep it ambitious, but sustainable. Overcommitting leads to reversals, which kill trust.

Step 3: Match Incentives to Culture and Motivation Drivers

A performance-first culture thrives on clear, individual rewards. A collaborative culture values shared wins and recognition. Survey or interview teams to understand what drives them, then build incentive structures around those drivers.

• Ownership mindset? Consider RSUs or profit-sharing
• Recognition-driven? Spot bonuses or non-monetary perks
• Team-first? Group incentives or goal-based bonuses

Step 4: Test, Learn, and Evolve

Start with a pilot. Roll out your plan in one function, gather feedback, and track performance. Make room for iteration. Incentive plans aren’t static; they need to evolve with business shifts, team feedback, and results.

You’re not just designing compensation, you’re designing behavior.

Conclusion

There’s no universal formula for the perfect incentive plan, because there’s no one-size-fits-all team. What works for a fast-moving sales squad may flop for an engineering pod working on long-term innovation. The key isn’t choosing the most popular incentive—it’s choosing the right one for your goals, culture, and stage of growth.

Whether you're designing a plan for a 10-person startup or reworking a layered enterprise model, the structure you choose directly impacts how your people perform, stay, and grow with your company.

So take a beat.
Review your current setup.
Compare it with the 12 types we just walked through.

Then ask: Is this really motivating the outcomes we care about most?

And if you’re looking for a simpler way to design, manage, and scale performance-driven incentive plans, Everstage can help. We work with high-growth teams to bring clarity, automation, and visibility into every layer of your compensation strategy.

Book a Demo with our team to explore what that could look like for you.