This incentive compensation plan seems to meet the most important characteristics of effective incentive compensation plans. It clearly distinguishes between wages and incentive compensation and does not attempt to replace wages with incentive compensation. The plan is precise in terms of what it rewards on the two elements of performance x shorter-term performance measures that are subject to cash bonuses (presumably these performance measures would relate to the organization’s key success factors) and longer-term measures of performance determined by share prices. The stock price component of the plan has a time frame that is long enough to promote a longer-term decision-making perspective, but short enough to support the reinforcement effect of rewards. In order to distinguish between market and executive effects on share prices, the longer-term plan could be adjusted to eliminate market-wide effects by basing rewards on performance relative to a peer group. A key characteristic of the plan is that it relies heavily on decisions made by independent outsiders. This improves the ethics associated with the administration and operation of this plan.

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Incentive compensation could be a type of variable compensation during which a salespersons or other employees earnings are directly tied to the numbe... View the full answer