Compensation and Incentive Plan

IV. Compensation and Incentive Plan

The term “compensation” refers to the combination of wages, salaries and benefits an employee receives in exchange for work. Compensation may include hourly wages or an annual salary, plus bonus payments, incentives and benefits, such as group health care coverage, short-term disability insurance and contributions to a retirement savings account.

Compensation also is a financial support system established under law to provide income, medical care ,and rehabilitation to employees for illness, injury, or death arising out of, and in the course of, their employment whether or not the employee was at fault. These benefits are claimed by the employees (or their dependents) as a matter of right and the employer cannot resort to any legal defence. Amount paid as compensation is based on the salary of the employee (also on the number of his or her dependents in some jurisdictions) and is usually subject to a specified maximum.

A total compensation package can have several components. An “employee compensation plan” collectively refers to all the components in addition to the manner in which the compensation is paid and for what purpose employees receive case bonuses, salary increases and incentives.

Incentive is a inducement or supplemental reward that serves as a motivational device for a desired action or behavior.

To succeed, an organization must attract and retain productive employees. Therefore, a business establishes competitive incentive plans to accomplish these objectives. Incentive plans, which are known as performance incentive plans (PIPs), motivate employees to exceed expectations and grow the business. Such plans promote exceptional behavior during a specific period. In addition, they attract potential employees to an organization and encourage company loyalty. However, an incentive plan must contain obtainable goals. Otherwise, employee morale will fade, and the plan becomes ineffective.

Types of Incentive Plans...