February 26, 2025

Annual Incentive Plans: How Gift Cards Can Help You Effectively Recruit and Retain Top Talent

Ditch the traditional cash bonus – successful companies use annual incentive plans with gift cards to keep employees happy and drive results.

gift cards

A successful company consists of talented and motivated people working for the same objective. How to recruit and retain such high-performing employees, as well as keep them delivering stellar results? With attractive annual incentive plans (AIPs).

In a competitive job market where turnover rates have climbed from 18% to 20% in 2024, according to staffing agency Merrit Recruitment’s numbers, companies should be rethinking their annual incentive plan strategies. Otherwise, they risk losing many of the 46% of professionals thinking of quitting their job – a worrying statistic shared in Microsoft and LinkedIn’s 2024 Work Index Trend Report.

Offering incidental cash bonus payouts doesn’t cut it – employees want and need actionable incentives. If employers can’t match the job with the right performance metrics-based incentives, they risk: 

• Decreased workplace performance 
• Lower employee retention
• Higher turnover cost

 Incentive compensation plans are an indispensable tool for modern businesses. By making reward distribution more actionable and transparent through AIPs, companies drive retention and company performance while maintaining higher employee satisfaction levels. So if an application asks about annual incentive or bonus schemes, you better have an AIP in place.

This guide explores what AIPs are, how these incentive compensation programs work, and how forward-thinking HR teams can transform their annual incentive plans using automated gift card solutions – making rewards more effective, distribution more efficient, and talent retention more successful in an increasingly competitive marketplace.

Read on for the full breakdown of annual incentive plans. 

Want to simplify your annual incentive program? Book a demo for zendit’s API platform and discover how easily gift cards can integrate into your corporate gifting strategy.

What Is an Annual Incentive Plan?

Annual incentive plans (AIPs) are performance-based compensation schemes that link rewards directly to measurable business objectives and individual performance goals. Unlike traditional bonuses that often become expected rather than motivational and lose impact, AIPs create a structured framework that rewards employees for measurable achievements.

[Annual incentive plans (AIPs) are performance-based compensation schemes that link rewards directly to measurable business objectives and individual performance.]

Modern AIPs differ from traditional bonus structures in three important ways:

1. Clearly defined performance goals: AIPs tie rewards to specific goals rather than arbitrary decisions
   
2. Measurable performance metrics: Goal setting is done and achievement tracked through clear performance measures or key performance indicators (KPIs)
   
3. Transparent reward structures: Employee efforts are awarded through clearly structured and fair incentive schemes

These might seem like simple principles – but together they can make a tremendous difference in the workplace. Implementing clearly defined incentive comp schemes creates transparent expectations that allow employees to more easily get behind the organizational goals. 

Ultimately, the alignment of company goals and financial rewards creates engaged employees – and the benefits of highly engaged employees are numerous.  The 183,000 global business units surveyed by Gallup report an increase of 18% in sales productivity and 23% in profitability, as well as happier and more loyal staff.

Source: Gallup

This shows that AIPs are particularly effective in today’s competitive job market, where high employee engagement causes 21% less turnover for high-turnover organizations (with more than 40% annualized turnover) and even 51% less turnover in organizations with lower annualized turnover.

Implementing a well-designed annual incentive plan fosters a culture of recognition and achievement. A culture where employees care about the company’s success – because it equals their success. 

Annual incentive plans help employees rationalize their hard work and see a direct correlation between effort and reward. 

That said, how do you create a clear and effective annual incentive plan?

3 key measures for a formulaic plan design

Annual incentive programs are a great way to align employees with business goals – especially when they include clearly defined performance metrics. 

That’s why the top 250 companies in the US increasingly have a formulaic plan design in place with predetermined metrics and weightings, according to FW Cook’s Annual Incentive Plan Report. This structured approach ensures that rewards are distributed fairly and transparently, creating a system employees trust and understand.

Source: FW Cook

What are the measures these companies use when defining performance metrics? FW Cook’s research shows that most organizations adopt multiple measures with different weightings to reflect their strategic goals and priorities:

• Profitability: Metrics like net income or EBITDA (earnings before interests, tax, depreciation, amortization) are typically weighted at 50% or higher, and ensure alignment with the financial performance and success of the company.
  
• Non-financial measures:  Team-wide strategic initiatives, such as customer satisfaction or sustainability goals, account for approximately 20% of the weighting.
  
• Individual performance modifiers: In 2024, individual employee performance metrics are more commonly incorporated as modifiers rather than weighted measures. 

This approach allows companies to balance organizational priorities with team and individual contributions, fostering a culture of shared success among team members.

Formulaic designs also eliminate ambiguity in reward distribution. Employees know exactly what is expected of them and how their performance will be measured. This clarity not only reduces disputes over fairness but also helps employees focus on achieving specific, actionable goals. 

For HR teams, it simplifies communication and helps guarantee consistency across departments. 

By adopting formulaic AIPs, businesses can create a culture of accountability and recognition where employees feel empowered to contribute toward shared organizational success. It’s not just about rewarding performance—it’s about building a workplace where every effort is valued and aligned with broader organizational goals.

How to calculate annual incentive plans

The benefits of setting performance targets through an AIP are clear – but how do you set up an annual incentive plan? 

Designing an effective AIP is straightforward. All it takes is a clear and consistent method for calculating payouts over a set performance period. 

As we mentioned before, the key is to tie rewards directly to measurable performance metrics while maintaining flexibility to adapt to individual and team contributions.

Most companies use a straightforward formula to determine incentive payouts:

[Incentive Payout=Base Salary × Target Percentage × Performance Factor]

Here’s how each part of the formula works:

• Base Salary: The employee’s annual salary serves as the foundation for the calculation.
• Target Percentage: This is the percentage of the base salary allocated for incentives, typically ranging from 5% to 30% and depending on the role and seniority. 
• Performance Factor: This multiplier is a combination of the various performance metrics we discussed earlier. 

So how does the formula work in practice? Let’s look at the below example.

An employee with a $100,000 base salary, a 10% target percentage, and a performance factor of 1.15 would receive:

$100,000×0.10×1.15=$15,000

The performance factor of 1.15 could mean the company achieved 120% of the operating income or revenue growth target (weighted at 75%) and 100% of a non-financial metric like customer satisfaction (weighted at 25%). Finally, a personal growth modifier could be based on evaluations.

Setting thresholds and caps for maximum payouts

For a fair annual incentive plan payout, the threshold should be attainable and the cap reasonable given the employee’s role and the company’s turnover. 

Companies often set thresholds and caps for maximum payouts. A common practice is to establish a minimum performance level (e.g., 80% of the goal) below which no incentive is paid and a maximum performance cap (e.g., 150% of the annual incentive target) to prevent excessive payouts. 

Linking rewards to clear metrics this way, companies drive company performance while at the same time making sure that incentives remain both equitable and financially viable.

Types of incentives for employees

When rewarding employees for their contributions, choosing the right type of incentive is key to achieve both employee satisfaction and business objectives. AIPs differ from traditional bonuses, not just in structure but also in their impact. 

Annual incentive plan vs bonus 

AIPs tie rewards to annual performance through specific, measurable goals and a pathway to achieve those goals by year-end. Traditional awards, on the other hand, are simpler and easier to implement. They mostly reward past performance and are often seen as a welcome surprise. 

You could argue that an annual incentive plan bonus plan is just that, an annual bonus – but there’s a clear distinction between rewarding employees with a bonus or setting up a structured salary incentive plan. 

Where do both fit in the salary structure? AIPs combine a base salary with an incentive-based salary. Bonuses can still be part of the reward structure, rewarding employees for milestone events or special achievements.

Types of incentives in AIPs

Within an AIP framework, companies can choose from various types of incentives, each with its own advantages and limitations:

1. Cash is the most obvious and universally accepted form of reward and directly contributes to earned salary. 
2. Stock options are ideal for senior executive compensation or long-term retention strategies but less effective for short-term motivation due to delayed gratification
3. Digital gift card incentives are increasingly popular due to their flexibility and personalization. Unlike cash, gift cards are perceived as a treat, creating a lasting positive impression

For non-executive employees and when stock options aren’t an option, combining cash with gift cards offers the best of both worlds—immediate financial benefits paired with memorable rewards. 

Why gift cards stand out as a reward employees value

Adding gift cards to your annual incentive plan balances practicality and hard economics with the emotional impact of a gift. That’s why incentive travel and gift cards are the most frequently used rewards by top-performing companies, according to the Incentive Research Foundation’s Driving Growth Through Total Rewards Report. 

But do employees appreciate being rewarded with gift cards rather than cash? As it turns out, 86% of employees feel gift cards are an appropriate incentive, a 2024 survey from financial services company Fiserv found. While cash remains the most preferred reward, employees like gift cards for their purchase flexibility and ease of use. 

Source: Fiserv

So how about cash rewards? Given the survey’s results, giving your employees a check might seem like an even better gift idea. In terms of performance, however, employees respond more positively to gift cards than to cash rewards of equal value, researchers at the University of Wisconsin found. 

While cash rewards are often used for daily expenses, gift cards are viewed as a special treat that recipients can spend on something they want instead of need. 

Instead of just paying out incentive-based salary in cash, employees can improve their AIP by incorporating digital gift cards as part of a hybrid reward strategy. This combines the financial benefits of cash rewards with the emotional impact and memorability of gift cards. 

But digital gift cards offer more than emotional impact – they offer scalability.

Using zendit’s gift card API for easy and effective AIPs

Zendit’s gift card API simplifies the process of buying and sending gift cards. With just a few clicks, you can give a wide range of the best gift cards for employees, making it a hassle-free experience for both you and your team. 

Better yet, API integration can automate the entire reward distribution process. 

With access to over 15,000 products from renowned retailers, zendit’s platform seamlessly integrates with your business systems to provide instant digital gift card delivery. This eliminates complex inventory management and allows for real-time tracking of rewards, making it ideal for companies looking to scale their incentive programs efficiently.

Ready to get started? Book a demo with zendit today and see how easy it is to buy and send gift cards to your employees. For more information, contact us.