Every organization has clear business and strategic objectives established. Given that the compensation plan must reward the behaviours, roles and personal objectives of the employees, these should be aligned with the organization s objectives. Thus, the key to successfully compensating employees for their contributions to the organization s goals is to directly align the interests of the organization and the employees. Performance measures, whether financial or non-financial, should be designed to encourage employees to strive to achieve the business overall goals. Another consideration in the design of an effective compensation plan is the influence of game theory.
Game theory is the model that predicts the outcome of conflict between rational individuals.
Clearly, the performance of employees is impacted by the method of their compensation. To properly align organizational and personal objectives, the compensation plan needs to promote a high level of motivation while avoiding the imposition of too much risk on the employees. In our report, we will discuss how to ensure that employees set personal objectives that align with the organization s objectives. Pay for performance and employee accountability compensation plans will be examined. Finally, we will look at the impact of game theory on the structure of an organization s compensation plan.