Incentive Compensation

Editor's Note: Incentivize top performers to develop within an organization.

Marta MoakleyOverview: Employers who emphasize incentive compensation stress the importance of pay for top performance. The incentives should be designed to generate business results and profits. Employers may use this type of compensation as an important employee retention and development tool.

Unlike base pay, which addresses the minimum compensation available to an employee, incentive compensation links an organization's business goals and compensation systems to employee performance. Employers may choose to design a compensation system that is comparatively low with respect to base pay, yet emphasizes bonuses and other compensation that is directly linked to top performance. Incentive compensation may be individual, team or department-based. However, employers should ensure that incentives payments are consistently aligned throughout the hierarchical structure of the organization.

Trends: Incentive plans need not be large, long-term or complicated in scope, such as complex "golden handcuffs" or "golden parachute" models, to achieve desired results. Increasingly, employers are using small spot cash awards for discrete, short-term projects that highlight contributions to an organization's bottom line and improve overall employee motivation.

Marta Moakley, J.D., Legal Editor

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