Incentive Compensation

Perhaps the most widely adopted application of Value Based management theory into actual management practice has been in the area of incentive compensation, or performance pay. Directors have long seen the wisdom of motivating executives with a variable compensation component based on performance. But these bonus systems often only loosely or ineffectively align the financial interests of managers with those of owners.

This section reviews some of the more common approaches to incentive compensation and their drawbacks, including competitive compensation, Value Based incentives, the idea of the bonus bank, and the Beyond Budgeting movement.

See how Obermatt's method of indexing operating performance here. It presents detailed information on how indexing to measure relative performance as Operating Alpha can greatly improve these approaches to performance pay, and solve one of its most intractable problems.