Incentive Compensation

Structuring incentive compensation is among the toughest managerial jobs. Analysis begins with a firm’s goals. What do we want to achieve? It then extends to different employee roles. How does each contribute toward achieving the firm’s goals? Finally, analysis encompasses the economic model. How much can the firm afford to pay in incentives?

For each employee role, the manager must define the behaviors or results that will earn incentive compensation and how they will be measured.

The plan must be clear, and the behaviors it rewards must be consistent with firm objectives. That doesn’t always happen on the first try.