Two important ways organizations measure their performance are in terms of their
profits and their stock price. In a competitive marketplace, profits result when an
organization is efficiently providing products that customers want at a price they are
willing to pay. Stock is the owners’ investment in a corporation; when the stock price
is rising, the value of that investment is growing. Rather than trying to figure out what performance measures will motivate employees to do the things that generate
high profits and a rising stock price, many organizations offer incentive pay tied to
those organizational performance measures. The expectation is that employees will
focus on what is best for the organization.
These organization-level incentives can motivate employees to align their activities
with the organization’s goals. At the same time, linking incentives to the organization’s
profits or stock price exposes employees to a high degree of risk. Profits and
stock price can soar very high very fast, but they can also fall. The result is a great
deal of uncertainty about the amount of incentive pay each employee will receive in
each period. Therefore, these kinds of incentive pay are likely to be most effective in
organizations that emphasize growth and innovation, which tend to need employees
who thrive in a risk-taking environment.