The Complete Guide to Executive Compensation 3/E, 3rd Edition

Chapter 7Short-Term Incentives

OVERVIEW

The short-term or annual incentive is defined by the period of measurement (namely, one year or less) not by the period of payment. Typically, short-term incentives create income, whereas long-term incentives (to be reviewed in the next chapter) create wealth. Short-term incentives are designed to include both downside risk and upside potential, rewarding the extent of accomplishment for the period. The period measured typically is the business year. The amount of payment goes up and down each year in relation to performance, thereby lowering costs to the organization when performance is low while providing ...