Monetary Incentives

Description

When designing incentive systems, companies seek to induce employees to act in the best interest of the firm. Among other things, incentive systems tackle the following issues: (1) How can firms retain talent?; (2) How can firms motivate managers to do their best?; and (3) How can firms incentivize managers to take risks without inducing excessive risk-taking? In this technical note, we illustrate how these issues can be dealt with using monetary compensation - that is, how firms can use monetary incentives to achieve goal congruence. It shows the most common tools used to design bonus compensation schemes as well as other, non monetary incentives.

Learning Objective

This note can be used on any managerial accounting program as long as other topics related to costs and, specifically, performance measurement have been dealt with beforehand.

Keywords

bonus Compensation Employee compensation Equity compensation Monetary incentives Non-monetary incentives Stock options