A formal statement clarifying the parameters of an annual payment provided to employees, contingent upon the achievement of predetermined performance objectives over a one-year period. It outlines the specific metrics used to assess performance, the target levels that must be reached to earn the incentive, and the methodology for calculating the payout amount. For instance, such a plan might specify that employees receive a bonus equivalent to a certain percentage of their salary if the company achieves a defined revenue growth target and they meet individual sales goals.
Such compensation strategies serve to motivate employees and align their efforts with the organization’s strategic goals. They can drive improved individual and team performance, foster a culture of accountability, and aid in attracting and retaining talent. Historically, these have evolved from more discretionary bonus systems to structured programs designed to reward specific, measurable outcomes, reflecting a greater emphasis on performance-based compensation.