The structure of an organization s compensation plan is significant to attracting, motivating and growing its employees. To ensure that the compensation plan is effective, both organizational and behavioural factors must be considered in the design. The essential component in developing a good plan is alignment of goals.
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.