Incentive Design: How Does it Relate to Executive Compensation and How Does it Encourage Business Growth?

Posted: July 21, 2020

What is incentive design? Incentive design refers to the creation of incentive compensation plans for employees. A simple example of incentive compensation is a performance-based bonus paid to an employee who achieves a determined goal. For a corporation, giving executives specific achievement goals with incentives attached is a sure way to encourage growth. Incentive design refers to the creation of incentive compensation packages. Designing executive incentive compensation packages often falls under the responsibilities of a Human Resources (HR) department. There are both formal and informal versions of incentive compensation. When we refer to “Incentive Design” however, we are leaning towards the formation of organized formal compensation packages. While it is worth mentioning that Informal incentives often play a large role for many businesses. Incentive-based pay practices play a huge role in attracting and retaining high-level employees and executives. Incentive compensation is something that a newly hired executive should consider when looking to maximize their earnings. A few different types of incentive structures are seen in both the public and private sectors. Annual incentive compensation plans encourage success over the course of the year, while spot rewards can create incentives for shorter term goals. Spot rewards are often used for isolated tasks or projects throughout the year. Another form of incentive compensation is known as a retention bonus. Retention bonuses are created to assist in retaining employees or executives during vital transitionary periods or business cycles. This is especially observed in the public sector. Profit-sharing is another well understood form of incentive compensation which highlights the success of the business trickling down to its executives. Profit-sharing is a nice example of how incentive design can benefit the executive as well as the business. Incentive design is a tool that can help connect employees to the goals of the company. Businesses will want to ensure that incentive compensation plans encourage performance that directly aligns with company goals and promotes growth. Incentive compensation needs to be well thought out so that all players are rewarded. To be clear, executives need to be incentivized adequately without causing overall harm to the company or its shareholders. If incentives are too strong, excellent performance could have a detrimental overall affect. Incentive design should be associated with growth. Executives will have regular salary agreements for their work. Incentive compensation is reserved for exceeding and growing which ideally benefits all company players. This is often referred to as reaching “stretch” goals which can take executives over and above their base responsibilities. Incentive plans should be written and well communicated between parties to ensure that everyone is clear on goals and incentives. Clear and finite goals can lead to more clarity as incentive compensation plans proceed. Group or team incentives are an option, though not always the most encouraging for an individual. All in all, incentive design is a crucial element of executive compensation packages and can help a company acquire strong employees, retain them, and achieve growth while benefiting its shareholders. To learn more about maximizing executive salary, visit our Contact Page, or contact us directly by email at or by phone at 415-618-6060.