We have talked about Return on investment (ROI) and Residual Income calculations being used to incentivize managers. There are advantages and disadvantages to both. Sales persons are often paid commissions on their sales. These are all examples of employee compensation beyond basic salaries or wages. Part of the motivation in using them is the desire to remove as much subjectivity (bias or prejudice) from the pay structure as possible and to promote good performance. Research has shown that wage increases or salary increases affect motivation only for a very short time.
In light of all this, what factors do you think should go into a performance-based compensation plan? If you were a business owner, how would you design your compensation structure? Would you use ROI, Residual Income, Sales Commissions or some combination of these and other ideas?