An award or a reward designed by corporate firms to their executives based on long-term performance indicators such as capital gains, earnings per share (EPS), return on assets, gross profits, cash flow, return on assets, and return on equity.
Accounting-Based Incentive Details
Accounting-based incentives are part of a widely used performance aids in establishing the financial accountability of company executives in their day-to-day work. The incentive plan offers rewards to executives in cash bonuses, or company equity, or both to increase shareholder values to their highest possible levels.
Executive compensation is a complicated and vital issue for investors to consider when making company decisions. An improperly compensated executive can cost shareholders a lot of money while producing an executive who falls shy of the proper incentive to increase share price or even gain the company profits.
Accounting-based incentives are determined by the success of the executive. Thus, adopting accounting-based incentives measures is the most preferred basis for compensation. Although it is essential to keep the company executive at their best to lead the company to meet set targets, accounting-based incentives are often an arguable subject. One of the best ways to maintain the executives' hard work and integrity is to develop a good working accounting-based incentives plan.
The basics of a good incentive plan include:
- Develop a simple, easy-to-understand, and comprehensive plan that clearly outlines roles and relates to accounting-based incentives.
- The plan should include the executives and other company employees before its implemented.
- Assists in supervising employees to ensure they aim to achieve the set accounting-based incentives.
- The plan should be able to evaluate the employee's performance in all assigned areas.
- Induces cooperation among the employees by total inclusion and eventually implementing it accordingly. This will minimize resistance and encourage hard work.
- Encourage workers to perform better by using the three popular incentives; praise, attention, and stock option.
- Total participation by the employees during the development stage should be acceptable to the employees and employer.
- Provides monetary compensation and recognition to employees at all times.
- Ensures reduction in unit production cost to cover up the compensation cost.
- Seek tested and proved standardized methods of accounting-based incentives implementation.
- Eliminates distrust between the employee and employer.
- Minimizes the cost required to operate the plan effectively.
Example of Accounting-Based Incentives
Dean has been working at Accounting123 for five years and is due for a promotion, but only if he can add two more accounts to the organization by the end of the month. The promotion has been used as a way to incentivize Dean and his growth at Accounting123.
Types of Accounting-Based Incentives
Generally, Accounting-Based Incentives are classified as financial (monetary) and non-financial (non-monetary).
- Financial (Monetary) - These are accounting-based incentives are in the form of money. This is money added to the basic salary or wages on a seasonal basis, as a reward for a good performance. It may involve an amount added on top of the employee's salary for successfully meeting set targets over a set period. This incentive, in turn, motivates employees to increase the client base of the organization.
- Non-financial (Non-Monetary) - Non-monetary accounting-based incentives touch employee's emotions to make them feel good, valued, and appreciated. It portrays the impression that people have towards one's role as an executive in the company, such as a corner office or larger offices. Also, it offers a future sense of stability and security among the company executives; not worrying about the future doubles the enthusiasm at work.