What Is a Compensation Plan?

Pays based on accomplishing specific activities or milestones; does not involve a quota. For example, a rep might be paid $500 for each sale of Product X, or $100 for each net new customer contract.

Increase in the commission rate for higher attainment levels. For example, commission rate might be 3% on the first 200k of revenue, 4% on the next 200k, then 5% for everything over 400k. Or can be based on quota attainment, for example, 3% up to 80% of quota, 4% from 81-120% of quota, and 5% over 120% of quota. Also known as a "kicker".

Amounts to be held in reserve to pay expected future compensation that will be due and payable at specific points in time. This is important for the Finance group in their financial planning and reporting, as it represents a liability and has an impact on cash flow. A compensation system should be able to forecast needed accrual amounts.

A performance review which is performed on each anniversary of an employee's hire date, and may be tied to a pay increase. See also Focal Point Review.

Application Programming Interface; refers to a connector between two software applications that allows them to communicate with each other and send data back and forth. A compensation application may provide APIs to communicate with other systems such as HR, CRM, ERP, etc.

Many compensation processes require review and acceptance of pay decisions. These approvals may follow a simple reporting hierarchy, or may be more complex if there are matrixed responsibilities where multiple approvers need to sign off on a pay decision. Approvals (and rejections), along with any reason codes or commentary, should be recorded and tracked in a traceable way to allow for auditing and compliance.

A computer technology, often used in conjunction with Machine Learning, that can analyze massive amounts of information and be used to support compensation tasks like establishing localized pay scales, ensuring pay equity, removing bias from compensation decisions, predicting performance, optimizing costs, and improving the employee experience, among others. Use of AI-driven compensation technology can mitigate the risk of employee turnover. See also Machine Learning.

Revenue recognition rule by the US Financial Accounting Standards Board (FASB), with a similar rule (IFRS 15) being issued by the International Accounting Standards Board (IASB), dealing with revenue for contracted goods or services that are delivered over time, such as software subscriptions. In dealing with the complexities brought about by these time-based revenue recognition rules an automated system can greatly reduce administrative time and effort while improving accuracy.

The degree to which a measurable target or quota has been achieved, expressed as a percentage. Often a factor in sales incentive or bonus calculations.

Wages paid for work for a specified amount of time, usually expressed as an hourly rate. Does not include overtime or incentives.

The fixed portion of an employee’s compensation, usually expressed as an annualized amount in compensation planning and analysis.

Comparing job descriptions and/or pay scales to standards for a given industry and/or market, to help determine fair and competitive pay rates. Benchmark information can come from a variety of providers who conduct salary surveys. The median pay for a given job can be used to calculate a compa ratio.

Non-wage compensation, such as health insurance, paid time off, retirement plans, wellness programs, and other considerations that add value to an employee's compensation package, and aid in attracting and retaining talent.

Variable cash compensation. May be discretionary (based on management discretion) or objectives-based (based on achievement of predefined objectives, actions, or production metrics), and may have components that are based on individual, team, and company goals. Generally paid on a fixed cycle, such as quarterly, half-yearly, or annual. The target bonus may be based on a fixed amount or a percentage of base pay.

A compensation budget that is developed by looking at the projected costs of paying the employees that are projected to be needed during the budgeted period, according to the proposed compensation plans, and aggregating those amounts to arrive at the total company compensation budget. Generally done at the department level and rolled up.

Compensation amounts allocated to individual departments. See "top-down," "bottom-up," and "zero-based" budgets.

Designated amounts of money for a given unit or subunit that then may be allocated within that unit, for a given compensation process, such as salary merit increases, bonus payouts, or promotions.

An upper limit on a commission that can be earned in a given period, typically expressed as a percentage of quota attainment. For example, if the cap is 120% and a rep achieves 140% of quota for the period, the rep will only be paid 120% of the commission target.

A form of performance bonus used in private equity and hedge funds, based on the firm's performance. It is typically a percentage of profits, but only paid above a certain rate of return (hurdle rate), and may have other restrictions and provisions.

The process of managing incentive compensation for external sales channels such as agents, agencies, and distributors. This requires accurate calculation of performance-based incentives due according to the contracts or incentive plans in place for each participant, and the timely and transparent payment and communication of the incentives.

Requiring return of compensation previously paid to an employee based on contractual provisions regarding fraud or misconduct or a future financial restatement or serious decline in performance. Most often used in the financial industry.

Pay that is earned from sales of a product or service in a given time period, based on the applicable commission plan(s), to be paid at a designated time. See also Commission payments.

Payments of commissions earned. Normally at designated intervals such as monthly or quarterly. Earnings and payments need to be tracked separately to support deferred comp, retroactive adjustments/clawbacks, year-end true-ups, or different payment cycles for different plan components/targets. (See also Commission earnings.)

A delineation of how commissions will be calculated and paid. There are many different plan structures, including Absolute, Relative, Straight-line, Tiered, Territory volume, Gross margin, and others.

A report of the commissions earned by a sales rep during a given period. Statements should enable reps to see exactly how their commissions were calculated, including showing the underlying sales, how the sales were credited/split, and the commission rate applied.

A ratio that indicates how a given salary compares to a standard. The standard may be the midpoint of the internal pay range for that job, or may be the median salary for the same job based on external market benchmarks determined from salary surveys. The compa-ratio is the salary being paid divided by the internal or external median salary. So if the salary is 125,000 and the range for the position is 100,000 to 130,000, the compa-ratio would be 125k/115k or 1.09.

The total financial and non-financial rewards an employee receives in exchange for work, including base salary, bonuses, incentives, equity, and benefits. Compensation is a key component of talent management, influencing motivation, retention, and organizational equity. Effective compensation management ensures fairness, compliance, and competitiveness, often requiring technology to manage complexity and support pay equity initiatives.

Determining the cost and distribution of all compensation elements. The two most common approaches are top-down and bottom-up. Another approach is zero-based budgeting. See the definitions of those terms.

The process of planning and delivering compensation, generally consisting of evaluation, setup, recommendations, review & approval, communication, and payment. Also called a Compensation round.

Planning for the complete compensation cycle, including designing compensation plans, running simulations, creating budgets, generating accruals, managing the review and approval processes, communication, and reporting.

Projecting the distribution and cost of compensation for a given time period. Often done quarterly, to provide Finance with up-to-date accruals. Your compensation system should enable you to take the latest performance forecasts and use them to generate an updated compensation spending forecast, using simulations to allow the performance assumptions and current compensation plans to calculate projected payouts.

A company’s guiding belief system about how it pays employees. It outlines the rationale behind pay decisions—such as whether to lead or match the market, how to balance internal equity with external competitiveness, and the role of performance in determining pay. It provides the “why” behind compensation practices, while the compensation strategy defines the “how.” See also Compensation strategy.

The collaborative process of designing and budgeting employee compensation to align with business objectives, market trends, and regulatory requirements. It involves input from HR, finance, and business leaders to ensure fairness, competitiveness, and sustainability. Organizations with complex pay structures benefit from dedicated compensation management technology to enhance efficiency, compliance, and decision accuracy.

The ability to produce the information needed by all stakeholders: employees, managers, HR, Finance, executives, the Board of Directors, auditors, and regulators. Reports ideally should be on demand via self-service for the appropriate audiences. Analysis should show compensation effectiveness, distribution, fairness, and discrepancies. Predictive analytics can use the company's data assets to spot trends, predict future performance, and proactively reduce risk.

See Compensation cycle.

Using compensation plans, together with performance assumptions about attainment of goals that drive variable pay, to estimate compensation spending and return on investment (ROI). A compensation management system should provide the ability to run accurate simulations based on varying what-if scenarios.

A company's approach to using compensation to attract and retain talent, and drive the human performance needed to achieve company goals. Since company priorities and strategies may shift throughout the year, compensation strategy and execution should be able to adapt quickly to redirect behaviors in support of new directions. See also Compensation philosophy.

See Pay transparency.

A compensation system that rewards based on an employee's skills and experience rather than their job title or position. Also known as skill-based and knowledge-based pay.

Limited time special events with special rewards designed to provide motivation for achieving a particular short term objective. Rewards typically can be a prize, cash bonus, or points in a point system.

See Sales crediting.

An EU regulation that requires large companies to disclose detailed ESG data—including workforce-related metrics such as pay equity. As outlined in beqom’s overview of CSRD and pay equity, the directive raises the bar for transparency, pushing organizations to track and report on fair compensation practices as part of their sustainability efforts.

The opposite of an accelerator. Penalizes a rep for being under quota by applying a lower commission rate. See also Accelerator.

See Deferred compensation.

An incentive plan in which eligible employees are awarded a payment based on a percentage of company profits during a given period of time, usually annually. In publicly traded companies this payment is often in the form of company stock. The amount distributed to each employee may be weighted according to the employee's base salary so that employees with higher salaries receive a greater amount of the shared pool of profits.

Bonus whose payment is subject to management decision as to whether and how much to pay; not based on predetermined criteria or performance objectives.

An advance payment against future commissions. A recoverable draw will be paid back by the sales rep when the commission is actually earned. A non-recoverable draw is not expected to be paid back; this typically would be used for new sales reps who realistically are not likely to earn commissions in the short term.

The dates at which a compensation plan becomes effective and/or ceases to be in effect for a given employee.

A set of criteria that determine whether an employee is eligible for participation in a given incentive plan at a given time. It may depend on job/role, time in role, location, etc.

The gradual reduction of a workforce over time due to resignations, retirements, or other voluntary and involuntary departures not immediately replaced. It serves as a key indicator of organizational health and workforce stability. It is the counterpart to employee retention, with higher attrition typically signaling lower retention and potential challenges in engagement, compensation equity, or performance alignment. See also Employee retention.

The total remuneration an employee receives for their work, including fixed pay (salary or hourly wages), variable pay (bonuses, incentives, commissions), equity-based rewards, and benefits. Compensation is often structured to align with performance, rewarding individual, team, or organizational achievements while ensuring competitiveness, internal equity, and compliance with labor regulations.

An option that may be offered to a recipient of long term incentives. It enables the employee to elect the financial instrument through which their reward is delivered. For example, an employee might be able to choose between stock or stock options.

The effectiveness with which an individual fulfills job responsibilities and contributes to organizational objectives. It is typically evaluated through measurable outcomes, behaviors, and competencies, and serves as a key input in performance management systems, influencing decisions related to compensation, development, and advancement within a fair and accountable framework.

Employee satisfaction refers to the extent to which employees feel content, valued, and fulfilled in their roles, influenced by factors such as compensation, recognition, work environment, and organizational culture. Compensation transparency and perceived fairness—often supported by data-driven pay equity tools—play a critical role in shaping and sustaining satisfaction over time.

A defined contribution retirement plan in the US that enables employees to acquire stock in the company. The employer purchases shares and redistributes them to participating employees. An ESOP provides a benefit to employees and helps to align employee interests with those of shareholders. See also ISOP and ESPP.

A type of ESOP where employees are able to purchase shares at a discounted price. After-tax pay is withheld and then used to purchase shares at a designated time, at a discounted price based on either the current price or the price at the beginning of the period.

Meaning specifically, equal pay for equal work, primarily used in the context of eliminating pay differences based on gender, but also applicable to race or other characteristics of individual workers not related to ability or performance. Workers in the same employment performing equal work should receive equal pay, unless any difference in pay can be justified. Equal work is considered to be work that is similar in terms of skills and knowledge required, or that is equivalent or of equal value. Many countries have laws requiring equal pay, therefore it becomes not only a recruiting and retention issue, but a risk and compliance issue. Software can help to analyze equal pay exposure and compliance. (See also Pay equity and Gender pay gap.)

Award of company stock or stock options to an employee. See also Employee Stock Ownership Plan (ESOP).

A legislative initiative aimed at closing the gender pay gap across the European Union. It introduces binding rules on salary transparency, employee rights to pay information, and mandatory gender pay gap reporting. For a practical breakdown of the directive’s requirements and impact, see beqom’s guide to the EU Pay Transparency Directive.

Compensation plan for senior executives, normally structured to reward good company performance and align executive pay with shareholder value. Typically consists of salary, short term incentives (cash bonus), and long term incentives (stock or stock options, or deferred cash), along with benefits, perquisites and severance/change-in-control agreements.

Employees who are exempt from the mimimum wage and overtime provisions of the US Fair Labor Standards Act (FLSA), generally referring to salaried rather than hourly workers.

Expatriates. Employees who are working in a country other than their home country, and may have special requirements regarding calculation and reporting of their pay, relating to currencies, taxes, etc.

See Flat rate commission.

Commission is a fixed amount per unit. See also Flat rate commission.

Commission rate is a fixed percentage of sales that does not vary based on volume (as with an accelerator). Also known as a Fixed commission.

A term coined by beqom to refer to the need to provide a consistent structure for compensation across a company, especially a global company, but to allow for local flexibility to adapt to local market needs.

A performance review which is performed at the same time for everyone in the company, and may be tied to a pay increase. See also Annual Review.

Projections of future financial performance. In terms of compensation the forecast will depend on headcount plans, compensation plan designs, and performance against the metrics to which compensation is tied.

A goal that must be met or event that must occur before a commission will be paid. The gate could be based on corporate, team, or individual performance, and can be financial or based on another KPI. For example, commissions are not paid unless target sales for a new product is met, or the customer renewal rate is above a certain level, or corporate EBITDA is above a certain amount. Gates incentivize the sales team to focus on more than just making the easiest sales or, as in the last example, ensure the company has the funds to pay commissions. Other terms sometimes used for the gating concept include "hurdles", "tripwires", "qualifiers" and "knockouts".

The earnings received by individuals, categorized by gender, within an organization or labor market. Gender pay reflects how compensation is distributed across different genders and can provide context for evaluating broader patterns in workforce equity and compensation practices.

Commissions paid based on gross margin, after cost of goods and/or cost of sales are deducted from the revenue. Forces reps to focus on profitable sales and discourages overuse of discounting.

A minimum commission amount that is guaranteed to be paid during a period of time, regardless of actual sales. Generally used for new sales reps who are just ramping up.

Additional pay for work that is dangerous or imposes physical hardship which is not adequately alleviated by protective devices.

Organizational structures in which subordinate entities roll up to higher level entities. An organization can have multiple hierarchies used for different processes. For example, one hierarchy might define management reporting relationships used for performance and merit reviews. A different hierarchy might be used for tax reporting. Another hierarchy might reflect a project based structure that has special incentives tied to it. Another might be a matrixed compensation hierarchy, reflecting the fact that some pay decisions for an employee require multiple inputs. One employee can hold different positions in multiple different hierarchies.

An organizational environment where individuals and teams consistently meet or exceed expectations through accountability, continuous improvement, and alignment with strategic goals. It is often reinforced by transparent performance management and equitable compensation practices, which together help motivate employees, recognize contributions fairly, and sustain long-term organizational effectiveness.

Individuals who consistently exceed performance expectations, deliver strong results, and demonstrate behaviors aligned with organizational goals. They are often identified through performance management systems and may be prioritized in compensation planning, development opportunities, and succession pipelines due to their outsized impact on business outcomes.

The ability to analyze employee data, such as demographics and compensation, to gain insights that can lead to improved retention, engagement, motivation, performance, and compliance. Dedicated compensation software often includes advanced analytics that can help keep costs in line with revenue, while maintaining a pay equity philosophy.

The systematic analysis and optimization of human resources workflows to increase efficiency, accuracy, and strategic alignment. It often involves streamlining tasks such as performance evaluations, compensation reviews, or pay equity audits through technology, data integration, and policy refinement to better support organizational goals and workforce needs.

Suites of software to manage common Human Resources tasks. See Human Capital Management (HCM) Software and Talent Management (TM) Software. HR suites may contain a compensation module, but these are generally not sufficient for managing large enterprise compensation.

The digital tools and platforms used to manage human resources functions, from recruitment and performance to compensation and compliance. It enables data-driven decision-making, operational efficiency, and improved employee experience. Specialized solutions, such as compensation and pay equity software, support fair and transparent workforce practices across increasingly complex organizational environments.

The strategic rethinking and restructuring of human resources functions to align more closely with organizational goals and evolving workforce needs. It often involves modernizing processes, systems, and structures—such as performance management or compensation frameworks—and may include adopting technologies that support data-driven decision-making and pay equity.

HCM software generally covers a broad range of HR tasks like recruiting, hiring, learning management, planning & administration, payroll, performance reviews, employee self-service, scheduling, absence management, analytics, and dispute management. While they may have a compensation module, they generally are not designed to handle complex enterprise compensation.

See Threshold.

See ASC 606.

The process of managing sales incentive compensation, including planning and modeling of plans, integrating the needed data sources, managing data, crediting of transactions, calculation of incentive payments, review and approval process, communication, dispute management, reporting and analysis.

A type of employee stock option that can be granted only to employees, with potential US tax benefits. Typically shares are offered to employees at a discounted price. ISOPs encourage employees to remain with a company and contribute to its growth in value and share price. See also ESOP - Employee Stock Option Plan.

Tailoring total rewards to meet the needs of individual employees. With a diverse and sometimes distributed workforce consisting of different generations of workers, individual compensation planning can help to engage and energize workers, and inspire loyalty. While in the past this would have been too burdensome to HR, now software can provide the analysis and intelligence needed to automate this task and suggest individualized rewards options. See also Personalized rewards.

Compensation management that is integrated with other HR systems such as the central employee database, performance management, learning management, etc., such that the other systems can feed information that is relevant to the calculation of compensation.

The fairness and consistency of compensation within an organization, ensuring that employees performing comparable work receive comparable pay, considering factors such as role, experience, and performance. It is a foundational principle in compensation management and a critical factor in maintaining workforce trust, engagement, and legal compliance.

A grouping or level that encompasses positions with the same or similar levels of responsibiity, impact, and authority, reflective of factors such as the knowledge, skills, and experience required by the jobs in that grade.

Quantifiable measures that demonstrate how effectively a company is achieving important business objectives. KPI achievement is based on attaining a certain KPI value by a certain date. KPIs are often used within calculations of variable compensation, such as bonus plans that may have components based on level of achievement of one or more KPIs, for example sales targets, customer satisfaction ratings, production goals, margin goals, etc.

See Accelerator.

See Competency-based pay.

Incentive compensation that is earned and awarded now but delivers value later, such as deferred bonuses or stock options. Long-term incentive plans (LTIP) are used to encourage key employees to stay with the company.

A compensation mechanism designed to reward employees, typically executives, for achieving sustained performance over an extended period. LTIPs often include equity-based awards or cash bonuses tied to long-term goals. Effective management of LTIPs requires transparency and consistency to ensure alignment with organizational strategy and support for equitable compensation outcomes.

A payment to an employee, such as a bonus, that is paid all at once.

A data processing technology that uses algorithms to sift through massive amounts of data and find trends and patterns. For example, an ML process can look at data like employee demographics, roles, levels, job functions, fixed and variable pay, and market benchmark data, to find employees that are flight risks, and determine appropriate compensation remedies that may keep them on board. ML can also identify peers based on their role, geography, and other relevant attributes, and identify whether there are any pay inequities, then further determine whether those inequities could be the result of biases. (See also Artificial Intelligence.)

The process of reducing or cancelling deferred incentive awards that have not yet vested. It is a requirement for many Financial Services companies by the UK and European banking regulations on compensation. Malus is intended to help to prevent misbehavior and excessive risk taking by punishing employees. It also helps align compensation to performance; malus may be applied to reduce compensation if an organization's performance has been below expectations.

Basing variable compensation upon completion of clearly defined objectives. Objectives must be carefully structured to ensure that achievement of the incentivized behavior will lead to the desired organizational performance.

An increase in wages based on the employee's assessed job performance or other measure of value. See also Promotion increase.

A grid used to provide guidance to managers in determining merit increases based on employee performance, sometimes also linked to the employee's position within a pay range for the role.

Clearly defined and quantifiable measures used to track and assess a given business process. Examples might include gross sales, gross margin, unit production, absentee rate, lead conversion, customer retention ratio, problem resolution time, returns, cost of sales, etc.

Creating variants of compensation plans so that they can be tested, analyzed, and approved. Ideally a model is based on real employee data and embodies the real world complexity of your compensation structures and calculations. Loading real performance data (historical or forecast) can help you see how the model performs in terms of total compensation cost, distribution, fairness, and ROI.

Compensation that is contractually obligated or automatically given, such as hourly wages, overtime pay, or bonuses that are tied to measurable performance criteria.

Compensation events that happen outside of regular compensation cycles. These can include promotions, retention actions, special performance recognitions, etc. They may require separate workflows and approval hierarchies.

A strategic framework used to set and track measurable goals within organizations. OKRs align individual and team efforts with broader company objectives, often informing performance assessments. In compensation contexts, they can support equitable, performance-based reward structures by linking outcomes to measurable impact rather than subjective evaluation.

Commission earned if performance is at 100% of target or quota.

Total fixed plus variable compensation an employee will receive if he/she achieves 100% of all variable compensation targets (bonuses and commissions).

The degree to which an organization achieves its goals through efficient structures, aligned strategies, and a high-performing workforce. It encompasses how well systems such as performance management, compensation planning, and equity practices contribute to sustainable outcomes, employee engagement, and the organization’s overall ability to adapt and compete.

Commission on sales applicable to other parties besides the sales reps, such as sales managers or product managers, based on a percentage of the sales or commissions of the sales reps, as determined by the sales crediting plan. See also Roll-up.

See Wage compression.

Ratio of fixed (base salary) vs. variable pay (bonus, commission), for example, 70% fixed, 30% variable. The variable component is based on 100% attainment, that is, on on-target bonus or on-target commissions.

There are several aspects to transparency. One is that employees should be able to understand how their pay is determined, meaning that they understand and accept their compensation plans, and have visibility into how each pay element is calculated in each pay period, perhaps meaning that they can see the underlying performance data that was used to drive variable pay calculations. Transparency also applies to the ability to see and trace how compensation is planned, calculated, and approved, to ensure accountability and so that auditors and regulators can assess compliance to legal requirements.

Person or entity being paid.

The act of generating checks/payments, and applying all necessary tax and other withholdings, after gross compensation amounts have been calculated and approved by the compensation management system.

A work environment where expectations, accountability, and results are clearly defined and continuously reinforced through aligned systems, leadership behaviors, and feedback mechanisms. It supports employee growth and organizational success by integrating performance management, equitable recognition, and compensation practices that reward meaningful contributions.

The process of identifying, measuring, incentivizing, and evaluating achievement of employee goals and objectives. Normally involves regular performance evaluations which result in a rating. See also Performance rating.

Measurable results that give an indication of how well an employee has done his/her job. See also Key Performance Indicators and Metrics.

A quantitative or qualitative assessment of employee performance over a given period of time that may then be used in calculating or justifying compensation adjustments such as a merit increase or bonus. Performance ratings can be fed to the compensation management system to automatically drive proposed pay increases.

Rewards packages designed to meet the needs and preferences of the individual, taking into account individual demographics, personality types, interests, etc, and sometimes offering an element of choice for the employee. See also Individual Compensation Planning.

See Deferred Profit-Sharing plan (DPSP).

A union-negotiated increase given to all eligible union employees on a contractually agreed upon date.

An increase in wages based on the employee's promotion to a new, higher value role. See also Merit increase.

Paying an amount proportional to the amount of time the employee is enrolled in a plan, rather than the full on-target amount for the period. For example, if a bonus plan pays $10,000 over a six month period but the employee is only eligible for the plan for three months of the period, the prorated amount would be $5,000. An employee who moves from one job to another may receive prorated payments from the applicable incentive plans for each job.

A number that a sales rep is expected to achieve, typically expressed as revenue, but quotas also can be tied to sales volume or metrics/activities (net new customers, customer retention, etc.), or some combination of these factors. Commission rates may be tied to attainment of quotas, as with a tiered commission that pays a lower rate for sales below quota, and a higher rate for sales that exceed the quota.

The process of setting, tracking, and adjusting sales quotas or targets. Quota setting can be done through a top-down or bottom-up process, or a hybrid of the two.

Revenue that is contracted to be paid over time, such as subscription or maintenance revenue.

See True-up.

Commission plan based on a predetermined quota or target.

Shares of company stock that vest over time or upon meeting performance criteria. These are common for executive compensation packages and are effective for retaining top talent. RSUs offer several advantages, such as delaying share dilution, aligning employee and shareholder interests, and promoting pay equity. While this form of equity compensation can be advantageous, it’s not suitable for all organizations. Before implementing RSUs, companies should thoroughly understand their advantages, drawbacks, and tax implications so the process can be properly executed and aligned with organizational goals.

See Retroactive pay.

Adjustments up or down to incentive earnings after initial payment was made. Can be necessitated by restated sales figures, returns, cancellations, clawbacks, etc. Requires careful tracking of transactions, earnings, payments by the compensation system.

The process of booking revenue according to financial accounting standards, such that revenue is recognized as the product or service is actually provided, regardless of when payment is received. See also the related regulations, ASC 606 / IFRS 15.

Any form of value provided to employees as a result of their employment, such as salary, bonus, stock, benefits, perquisites, gifts, prizes, and various forms of recognition.

Period for which a given reward is calculated and processed, typically annually for salaries, monthly for commissions, quarterly or half-yearly or annually for short or long term incentives. A company may have multiple and overlapping rewards cycles.

An adjustment to variable compensation to account for currently known risks or adverse performance outcomes. The known risk of the transaction that triggered the reward can be factored into the reward at time of payment. Ex-post risk adjustment refers to adjustments made to compensation after an adverse performance outcome, which may be the result of risks that have materialized (crystalized risk) or of misconduct. Ex-post risk adjustments include reducing current year awards, the application of malus, and clawbacks.

A designated amount of pay applicable to designated roles, in cash or shares, over and above salary, which does not count towards pension and benefits expenses, and which may or may not be deferred over a vesting period. The European Banking Authority (EBA) ruled in 2015 that role-based allowances count as bonuses and therefore are subject to a cap. The term also can be used to refer to an allowance paid to an employee based on additional special responsibilities required to be undertaken as part of their position.

In relation to sales commissions, a roll-up is a commission on sales applicable to parties above the sales rep in the sales reporting hierarchy, such as the sales manager or district manager, based on a percentage of the sales or commissions of the sales reps. Roll-down or roll-over is also possible, for example if sales by a sales manager results in commission payment to the subordinate sales team members. See also Override.

See Restricted Stock Units.

The range of salaries, minimum to maximum, for a job grade. Typically influenced by factors such as job requirements, education, experience, geography, and job market conditions,

See Wage compression.

The process of planning salaries and salary increases, which may involve job analysis, market research and benchmarking, developing job grades and salary bands, calibration, creating a budget, and managing the salary review and merit increase process.

The process by which an individual employee's pay is set for the forthcoming period. Typically done annually and referred to as the Annual Salary Review (ASR), the salary review is generally conducted by an employee's manager, taking into account the employee's past performance, role and goals going forward, and budgetary guidelines.

Assigning credit for a sale, and thereby the related commission, to the appropriate member or members of the sales team, according to a predefined set of business rules. Crediting can be as simple as assigning the full sale value to one rep, or can be more complex if split amongst multiple reps, or if there are team components applied based on territory or market segment. Crediting is the first crucial step in the sales incentive calculation process.

Any type of direct or indirect reward related to sales.

The process of setting, tracking, assessing, and incentivizing sales objectives, beyond commissioning for sales. Objectives may include things like cross-selling, up-selling, customer retention, customer satisfaction, net new customers, product mix, new product sales, etc.

The process of managing sales performance, including planning and modeling of incentive plans, managing territories and quotas, integrating the needed data sources, processing sales data, crediting transactions, calculating incentive payments, reviewing and approving payments, communication, dispute management, reporting and analysis.

Models that allow compensation administrators to alter variables in compensation plans or performance assumptions to see the result, as a way of testing and determining the optimum compensation plan. Sometimes called "What-ifs."

The selling of some shares of stock from a stock incentive award to cover tax liability for the employee.

A tax-advantaged employee share plan in which shares are held in trust on behalf of employees. All employees must be eligible to participate in the plan provided that certain criteria are met. May include free shares, partnership shares (paid for by employees out of pre-tax salary), matching shares (given by the company to employees who purchase partnership shares) and dividend shares (purchased with dividends from other plan shares). Was formerly known as the all-employee share ownership plan (AESOP).

Variable incentive payments that are paid when earned (as opposed to long term or deferred incentives).

See Competency-based pay.

Commissions paid at different percentages for different volumes of total sales within a given time period. Can be based on units or value. For example, the commission rate is 10% of total sales up to $100,000 in sales, but 15% of total sales if sales exceed $100,000, and 18% of total sales if sales exceed $200,000. The scale can slide up or down; for example, an investment firm might pay lower percentage commissions on higher volumes because clients are charged lower commission rates for high volumes.

A specially funded incentive program, usually temporary, to drive certain behaviors at certain times. Can take any form, such as cash bonus, contest prize, etc.

Sharing of sales credit and commission amongst two or more payees. The sales crediting process will split the credit and commission according to pre-defined business rules.

Reward plan that gives employees the right to buy their company’s stock at a set price after a certain period of time.

Commission plan that rewards a rep directly correlated to the percentage of quota reached. For example, if the rep attains 80% of quote, the payout is 80% of the full on-target commission amount. If the rep attains 125% of the quota, the payout is 125% of the OTC.

TM software generally covers HR tasks related to acquiring, developing, and retaining talent, like workforce planning, talent acquisition & onboarding, performance appraisals, goal management, learning management, competency management, career development, and succession management. While many have a compensation module as well, they generally are not designed to handle complex enterprise compensation.

The process of designing and allocating sales territories amongst the sales team. Territories can be defined in terms of geography, industry vertical, product line, client size, client priority, etc. Well designed territories are necessary to provide proper sales coverage and motivating opportunity to sales reps. Automated territory management can allow for territory readjustment and optimization throughout the year.

Commission is based on total sales within a territory during a given time period and is split amongst the reps that serve the territory, according to predefined business rules.

A minimum performance level that must be achieved in order to earn an incentive payment. Also known as a hurdle.

Commissions paid at different percentages for different volumes of sales. Can be based on units or value. For example, the commission rate is 10% on units up to 1000 units, 15% on units from 1001 to 5000 units, and 20% for units exceeding 5000 units. Thus a rep who sells 6500 units would be paid 10%*1000 + 15%*4000 + 20%*1500.

A compensation budget that starts with a target total compensation spending number for the company, which is then allocated to departments, and then further allocated downstream within each department, to team and individual levels. Allocations typically take into consideration prior year compensation numbers, headcount projections, current goals and priorities, and performance expectations.

Total of all cash based compensation, fixed and variable, including salary, bonus, commission.

Total value of all cash based compensation, long-term incentives, and benefits. (TDC + benefits)

Total of all cash compensation plus long-term incentive compensation (TCC + LTI).

All components of the pay package that are guaranteed, including salary and benefits. Excludes variable compensation.

All of the compensation, benefits, perks, recognition, and other value received by an employee. This should include sales incentive compensation, even when sales incentives are managed separately from other rewards. A compensation system should be able to generate total rewards statements that show the employee the full range and value of all rewards they are receiving.

A report, usually monthly, showing an employee the full range of rewards earned and paid, monthly and YTD, preferably including or linked to information showing exactly how the rewards were derived, including any related performance metrics and calculations. In a dedicated compensation platform, these are generated automatically and available on demand.

Approach used by a company to utilize various forms of rewards to attract, retain, motivate, and align employees, with the end goal of fulfilling the mission and objectives of the organization.

Adjustment or "regularization" of a bonus typically performed at year end to even out quarterly performance. If an employee missed some quarterly goals and therefore missed some quarterly bonus, but by year end has met the annual goal, an adjustment can be made at year end. For example, if the annual target was 100, with 25 each quarter, and the employee attained 15 each in Q1 & Q2 (missed goal) but then attained 30 in Q3 and 40 in Q4, the attainment was 100 for the year, meeting the annual target. An adjustment can be made to reward the annual performance, especially if the quarterly payments do not reward partial achievement and/or are capped and don't reward over achievement.

Implicit attitudes or stereotypes that influence decisions, including pay and promotion, without conscious awareness. Can be avoided through tools that support data-driven decision making.

Compensation that is dependent upon results such as attainment of goals or targets. Bonus plans and Short Term Incentives fall into this category.

Timing of when certain forms of deferred compensation become fully owned and accessible by the employee, such as stock options or deferred cash compensation. Vesting schedules give employees incentive to stay with the firm, as non-vested assets are generally forfeited if the employee leaves the company. Typical vesting periods are 3 to 5 years, during which the asset gradually becomes vested.

The total amount that an organization pays its employees (salary plus bonus) within a given period, usually expressed on an annual basis. Does not include wages paid in kind, like employers' contributions.

Scenarios that allow compensation administrators to alter variables in compensation plans or performance assumptions to see the result, as a way of testing and determining the optimum compensation plan.

The sequence of events required for proper execution of a compensation process, such as salary reviews, bonus allocation, long term incentive awards, etc. Often includes review & approval processes. Workflows can be driven by compensation management software.

A colloquial term for additional compensation given for unique skills, rare expertise, or business-critical capabilities.

The formal process conducted at the end of an annual performance cycle to assess employee pay, performance, and equity adjustments.

Method of creating a budget where each time you start from a zero base, rather than using the previous period's budget as a baseline and modifying. Even existing and recurring expenses have to be justified newly each time rather than automatically continuing or being increased. This approach is generally more time consuming and may have other shortcomings but is thought to be a method of keeping expenses lower.