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Long-term Incentives

What are long-term incentives?

Long-term incentives, often shortened to LTIs, are a form of compensation designed to reward employees, typically executives and senior leaders, for contributing to an organization's performance over a multi-year period, usually three to five years. Unlike base salary or annual bonuses, which reward short-term performance, long-term incentives are structured to vest over time, aligning the interests of employees with the sustained success of the organization and its shareholders.

Long-term incentives commonly take the form of equity, such as stock options or restricted stock units, though they can also be structured as cash-based plans tied to multi-year performance metrics. The defining feature is the time horizon: value is earned gradually, and employees typically forfeit some or all of an unvested award if they leave before the vesting period ends.

Why are long-term incentives important?

Long-term incentives exist to solve a specific problem: short-term compensation structures can encourage decisions that boost near-term results at the expense of an organization's longer-term health. A leader focused purely on annual bonus targets might, for example, defer necessary investment or take on excessive risk to hit a yearly number. Long-term incentives counterbalance this by tying a meaningful part of total compensation to outcomes that only materialize over several years, such as sustained revenue growth, stock price performance, or strategic milestones.

They also play a significant role in retention. Because most long-term incentive plans use vesting schedules, employees have a direct financial incentive to stay with the organization. Losing unvested equity or cash awards is often a significant deterrent to leaving, particularly for senior employees whose long-term incentive value can represent a substantial portion of their total compensation.

Key forms of long-term incentives

Long-term incentive plans vary considerably depending on the organization, industry, and the behavior being incentivized.

  • Stock options give employees the right to purchase company stock at a fixed price after a vesting period, allowing them to benefit if the stock price rises above that price.
  • Restricted stock units (RSUs) grant employees actual shares of stock once vesting conditions are met, without requiring a purchase, and are generally considered less risky for employees than stock options since they retain some value even if the stock price falls.
  • Performance shares or performance share units (PSUs) vest only if the organization meets specific, predefined performance goals over the vesting period, such as earnings targets or relative shareholder return compared to peers.
  • Long-term cash incentive plans offer cash payouts tied to multi-year performance goals rather than equity, which can be useful for private companies or organizations that prefer not to dilute ownership.
  • Stock appreciation rights (SARs) provide the cash or stock value equivalent to the increase in a company's stock price over a set period, without requiring employees to purchase or hold actual shares.

Many organizations combine several of these vehicles into a single long-term incentive program, balancing retention, performance alignment, and cost considerations.

Why long-term incentives matter for compensation strategy

Long-term incentives typically represent the largest single component of total compensation for senior executives at public companies, which makes how they are designed, granted, and communicated a significant factor in both cost management and talent strategy. Getting the structure wrong, whether by setting performance targets that are too easy or too difficult to achieve, or by failing to account for changes in stock price volatility, can undermine both the retention and the pay-for-performance goals the plan is meant to serve.

Long-term incentives are also under increasing scrutiny from a governance and disclosure perspective. Shareholders, proxy advisors, and regulators pay close attention to how executive long-term incentive plans are structured, whether performance metrics are rigorous and disclosed clearly, and whether payouts are proportionate to actual company performance. This has made long-term incentive design a frequent focus of compensation committees and a common area of shareholder engagement.

Who benefits from long-term incentives?

Long-term incentives affect several groups within an organization, each with different priorities around how these plans are designed and communicated.

Compensation and benefits teams design and administer long-term incentive plans, balancing competitive market positioning against cost, dilution, and accounting implications. Executives and senior leaders, as the primary recipients of most long-term incentive awards, rely on clear communication about vesting schedules, performance conditions, and expected value. Finance leaders track the accounting and cash flow implications of equity and cash-based long-term incentive plans, since these can be a material line item in an organization's financial statements. Boards and compensation committees oversee long-term incentive design as part of their governance responsibilities, ensuring plans align with shareholder interests and withstand external scrutiny. Employees more broadly, particularly at organizations that extend long-term incentives beyond the executive population, look to these plans as a signal of how the organization rewards sustained contribution.

Common approaches: pros and cons

Organizations generally choose between a few broad categories of long-term incentive vehicles, each with different tradeoffs.

  • Time-based equity (such as RSUs that vest simply based on tenure) is straightforward to administer and clearly communicates retention value, but it does not directly tie payout to company or individual performance.
  • Performance-based equity (such as PSUs) more directly links reward to results, which shareholders and proxy advisors generally favor, but it requires setting performance metrics and targets that are rigorous, measurable, and resistant to manipulation.
  • Cash-based long-term incentives avoid share dilution and can be easier to value and communicate, but they do not give employees the same direct stake in company ownership, and they carry different cash flow implications for the organization.

Most organizations use some blend of these approaches, adjusting the mix based on industry norms, company stage, and how directly they want to tie compensation to shareholder outcomes.

What is the difference between long-term incentives and short-term incentives?

Short-term incentives, most commonly annual bonuses, reward performance against goals set for a single fiscal year, such as revenue targets, individual objectives, or team-based metrics. They are typically paid in cash shortly after the performance period ends. Long-term incentives, by contrast, reward performance and retention over a multi-year horizon, are more often delivered through equity, and vest gradually rather than paying out all at once. In practice, most senior compensation packages use both: short-term incentives to drive annual execution, and long-term incentives to sustain focus on multi-year outcomes and retain key talent.

How do you evaluate a long-term incentive plan?

Assessing whether a long-term incentive plan is well designed involves looking at a handful of key factors.

  • Alignment with strategy checks whether the performance metrics used, if any, actually reflect the outcomes the organization most needs over the relevant time horizon, rather than metrics chosen simply because they are easy to measure.
  • Competitiveness compares the value and structure of the plan against market benchmarks for similar roles, industries, and company size.
  • Vesting design examines whether the vesting schedule and any performance conditions strike the right balance between retention and rewarding genuine performance.
  • Dilution and cost measure the impact of equity-based plans on existing shareholders and the organization's financial statements.
  • Transparency and communication assess whether employees receiving long-term incentives understand how their awards work, what they need to do to realize full value, and what the awards are actually worth.

Organizations managing long-term incentive programs at scale often look for compensation platforms that can model different plan designs, track vesting and performance conditions across employees, and support the reporting boards and compensation committees require.

Best practices

Designing and administering long-term incentive plans effectively depends on a few consistent principles.

  • Tie performance-based awards to metrics that are meaningful, measurable, and difficult to manipulate, and disclose the rationale behind them clearly.
  • Set vesting periods long enough to support genuine retention and multi-year thinking, without being so long that employees discount the award's value too heavily.
  • Review plan design regularly against market benchmarks, since long-term incentive practices shift as talent markets, accounting standards, and shareholder expectations evolve.
  • Communicate award value and mechanics clearly to recipients; a long-term incentive that employees do not understand does little to influence their behavior or improve retention.
  • Model the cost, dilution, and cash flow implications of any plan before rolling it out, particularly for equity-based awards at public companies.

Frequently asked questions

Are long-term incentives only for executives?

Historically, yes, but many organizations now extend long-term incentives further into the workforce, particularly for specialized talent, high performers, or roles that are difficult to retain.

What is a typical vesting period for long-term incentives?

Three to five years is most common, though this varies by industry, company stage, and the type of award granted.

Do long-term incentives always involve company stock?

No. While equity is the most common vehicle, particularly at public companies, long-term cash incentive plans are also widely used, especially at private companies or where dilution is a concern.

What happens to unvested long-term incentives if an employee leaves?

This depends on the specific plan terms, but unvested awards are commonly forfeited if an employee leaves voluntarily before the vesting period ends, though some plans include exceptions for retirement, death, or involuntary termination.

How do long-term incentives affect a company's financial statements?

Equity-based long-term incentives generally create a compensation expense recognized over the vesting period, along with potential dilution to existing shareholders; cash-based plans create a liability that is typically recognized as performance conditions are met.

Who decides how long-term incentive plans are structured?

For executive plans, the board's compensation committee typically has ultimate oversight, often supported by the compensation and finance teams and outside advisors.

Summary

Long-term incentives are a form of compensation designed to reward sustained performance and retain key talent over a multi-year period, most commonly through equity such as stock options, restricted stock units, or performance shares, though cash-based plans are also used. They play a central role in aligning employee and shareholder interests, and their design is subject to close scrutiny from boards, shareholders, and proxy advisors. Getting long-term incentive design right depends on choosing meaningful performance metrics, setting appropriate vesting schedules, and communicating award value clearly to the employees who receive them.

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A

  • Absolute commission 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.

  • Accelerator

    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".

  • Accruals

    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.

  • Annual review

    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.

  • API integration

    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.

  • Approvals

    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.

  • Artificial Intelligence (AI)

    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.

  • ASC 606

    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.

  • Attainment

    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.

B

  • Base rate

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

  • Base salary

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

  • Benchmarking

    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.

  • Benefits

    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.

  • Bonus

    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.

  • Bottom-up budget

    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.

  • Budget allocations

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

  • Budget pools

    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.

C

D

  • Decelerator

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

  • Deferred compensation

    Compensation, whether cash or equity, that is earned and accrued in the present but paid at a later date, such as a deferred bonus, deferred profit sharing, or stock plan. The future payment must be accrued for.
    Read more →

  • Deferred pay

    See Deferred compensation.

  • Deferred Profit-Sharing Plan (DPSP)

    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.

  • Discretionary bonus

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

  • Draw (recoverable and non-recoverable)

    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.

E

F

  • Fixed commission

    See Flat rate commission.

  • Flat commission

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

  • 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.

  • Flexibility in a framework

    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.

  • Focal point review

    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.

  • Forecasts

    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.

G

H

  • Hazard pay

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

  • Hierarchies

    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.

  • High performance culture

    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.

  • High performance culture

    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.
    Read more →

  • High performers

    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.

  • HR analytics

    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.

  • HR process improvement

    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.

  • HR suites

    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.

  • HR technology

    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.

  • HR transformation

    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.

  • HR Transformation

    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.
    Read more →

  • Human Capital Management (HCM) Software

    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.

  • Hurdle

    See Threshold.

I

  • IFRS 15

    See ASC 606.

  • Incentive compensation management (ICM)

    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.

  • Incentive Stock Option Plan (ISOP)

    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.

  • Individual compensation planning

    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.

  • Integrated compensation management system

    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.

  • Internal equity

    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.

J

  • Job grade

    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.

K

  • Key Performance Indicators (KPI)

    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.

  • Kicker

    See Accelerator.

  • Knowledge-based pay

    See Competency-based pay.

L

  • Long-term incentive plan (LTIP)

    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.

  • Lump sum payment

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

M

  • Machine Learning (ML)

    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.)

  • Malus

    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.

  • Management by Objective (MBO)

    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.

  • Merit increase

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

  • Merit matrix

    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.

  • Metrics

    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.

  • Modeling

    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.

N

  • Non-discretionary pay

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

O

  • Off-cycle plan management

    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.

  • OKR (Objectives & Key Results)

    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.

  • On-Target Commissions (OTC)

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

  • On-Target Earnings (OTE)

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

  • Organizational effectiveness

    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.

  • Override

    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.

P

Q

  • Quota

    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.

  • Quota management

    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.

R

  • Recurring revenue

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

  • Regression Analysis

    Regression analysis is a statistical method that models pay against the factors that legitimately influence it, such as role, tenure, and performance, so any unexplained gap can be identified and addressed. Learn how it works and why it's central to defensible pay equity analysis.
    Read more →

  • Regularization of bonus

    See True-up.

  • Relative commission plan

    Commission plan based on a predetermined quota or target.

  • Restricted Stock Units (RSUs)

    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.

  • Retro pay

    See Retroactive pay.

  • Retroactive adjustments

    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.

  • Retroactive pay

    Compensation issued to an employee to correct underpayment from a prior pay period, typically due to delayed raises, miscalculations, or adjustments in pay rates. Effective compensation management systems help ensure retro pay is calculated accurately and transparently, maintaining compliance and supporting trust in payroll practices. See also Retroactive adjustments and Clawbacks.
    Read more →

  • Revenue recognition

    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.

  • Rewards

    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.

  • Rewards cycle

    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.

  • Risk adjustment

    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.

  • Role-based allowance

    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.

  • Roll-up

    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.

  • RSU

    See Restricted Stock Units.

S

  • Salary band

    A salary band is a defined pay range, set by a minimum, midpoint, and maximum, that establishes fair and consistent pay for a given role or job level.
    Read more →

  • Salary compression

    See Wage compression.

  • Salary management

    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.

  • Salary review

    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.

  • Sales crediting

    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.

  • Sales incentives

    Any type of direct or indirect reward related to sales.

  • Sales objectives management

    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.

  • Sales performance management

    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.

  • Scenarios

    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."

  • Sell to cover

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

  • Share Incentive Plan (SIP)

    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).

  • Short term incentives

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

  • Skill-based pay

    See Competency-based pay.

  • Sliding scales

    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.

  • SPIF (Sales Performance Incentive Fund)

    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.

  • Split

    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.

  • Stock option plan

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

  • Straight line commission

    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.

T

  • Talent Management (TM)

    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.

  • Territory management

    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.

  • Territory volume commission plan

    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.

  • Threshold

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

  • Tiered commissions

    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.

  • Top-down budget

    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 cash compensation (TCC)

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

  • Total compensation package (TCP)

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

  • Total direct compensation (TDC)

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

  • Total guaranteed compensation (TGC)

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

  • Total rewards

    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.

  • Total rewards statement

    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.

  • Total rewards strategy

    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.

  • True-up

    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.

U

  • Unconscious bias

    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.

V

  • Variable compensation

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

  • Vesting schedules

    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.

W

X

  • X-factor pay

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

Y

  • Year-end compensation review

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

Z

  • Zero-based budgeting

    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.