¶ … Incentive Compensation

No one likes to see a cut in their expected salary, especially a deduction as large as the 61% suffered by Stephen F. Wiggins, former chairman and chief executive officer of the failing Oxford Health Plans Inc. However, by linking company performance to incentive compensation, this can be the unfortunate result for any employee. It has been argued that by doing so, CEOs feel a greater sense of personal investment (no pun intended) in the firm they are leading. Worker's bonuses are also sometimes tied to the success of a particular project or to company success as a whole, particularly if stock options are a significant part of the employee's payment package.

If the employee is part of a company, especially a rapidly expanding company, the personal financial yield for the employee over time may be impressive, as the company rapidly increases in value. However, in a company that is faltering, and was faltering even before the CEO or employee came to helm, the knowledge that one's incentives are unfairly tied to company performance can potentially be frustrating, if the company continues to struggle because the company's altered leadership strategies take a long time to have their effect. Also, environmental factors as well as leadership can affect overall company performance. Oxford's floundering was due partially to internal control issues that may or may not have been under the direct control of Wiggins, and also had roots in the problems afflicting the health care industry in general. This is why: "Financial rewards in a fast-changing business environment could undermine a company's ability to build trust and commitment unless management and employees have an honest discussion about their mutual expectations" ("Performance-Based Salaries Don't Always Pay Off,"2003, Harvard Business School Working Knowledge). Finally, it must be remembered that the effects upon the psyche of even a well-compensated CEO who does not receive his or her expected compensation may frustrating but this effect can be even more devastating for a less well paid, lower-level employee.

Works Cited

Performance-Based Salaries Don't Always Pay Off." (26 Apr 2003).

Harvard Business School Working Knowledge. Retrieved 18 Aug 2007 at http://news.com.com/Performance-based+salaries+don't+always+pay+off/2009-1069_3-997668.html