Incentive Plan Meaning & Definition

Published by MBA Skool Team, Last Updated: December 09, 2015

What is Incentive Plan?

Incentive plans are methods in which employees of an organization are kept motivated for the work that they do, and are given incentives on reaching or accomplishing certain organization goals. The incentive plans can be for lower level employees, middle management and senior management. It usually comprises of incentives like profit sharing, project bonuses, stock options, sales commission etc.

Incentive plans are plans for low level employees who are at the bottom of the organization’s hierarchy, which mostly includes staffs and first line supervisors. For example, a software programmer might receive a performance bonus for creating a low cost application which helps the organization in cost optimization.

The middle management incentive plan includes the work group managers. For example, IT manager would get a performance bonus for completing all the work projects in time and within the budget allocated to him.

Incentive plans for upper management is applicable to executive employees. For example, a controller for maintaining very high cash flow during difficult times will receive company stock options for such an exceptional performance.

Different types of incentive plans are:

1. Profit Sharing: It is available to full time employees. The organization provides funds/bonuses bases on a percentage of the amount of profit before tax. The employee receives a portion of this fund. For example, an employee receives a salary. This might be directed to a retirement program. Unfortunately, this method gives the poor performing employees an advantage.

2. Project Bonus: This is awarded to a team or an individual. The organization divides the reward among its team members according to the base salary of every employee. The organization might also reward a poor performing employee. This is a disadvantage for other employees as well as the team.

3. Stock options: This option is normally to the upper management. An organization might offer employee stock options to an executive employee for retaining that particular executive. The employee has the option to purchase company stock at a fixed price without considering the current market price of that company.

4. Sales Commission: When the company is not performing well, it is difficult to recruit sales employee who will be ready to work strictly on sales commission. To tackle this, the organization might offer base salary plus sales commission. The salesperson would definitely receive a base salary which will remain fixed and he/she will receive commission on every sale done.


Hence, this concludes the definition of Incentive Plan along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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