Incentive compensation
Incentive compensation ties a manager's pay to measured performance — such as profit or return on investment — to align their self-interest with organisational goals; poorly designed schemes encourage short-termism or gaming.
FrameworkAgency theory
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Owners want long-term value; managers may instead favour job security or an easier workload. Incentive compensation — a bonus tied to profit, share options tied to the stock price, or a return-on-investment target — creates a zone where both interests overlap: the manager benefits personally only when the organisation genuinely performs well.
Where it fits
TopicResponsibility Accounting & DecentralisationAdvancedSubjectManagerial AccountingAdvancedTopicDivisional Performance MeasurementAdvanced