The incentive part of “total” compensation (which includes the base) is considered a variable cost in that it will depend on the performance of the individual and/or the company. It is called “incentive” because it is meant to motivate the employee to focus on particular elements of her job. The most obvious type of incentive is sales commission. While incentives are usually positive forces, different incentive plans geared toward different positions can actually work against each other and be counter-productive.
Designing effective incentive plans that both motivate the right employee behavior AND are not a financial burden is complicated and is best managed by a human resources or compensation professional working with accounting and finance, and operations professionals.
See also Compensation (General).
- Basics on choosing an incentive plan (BusinessTown.com).
- Designing an incentive compensation plan for employees (HR.com).
- Establishing an incentive compensation plan (morebusiness.com).