For organisations to achieve their goals, it is important that management control systems motivate managers and influence their behaviour to align their goals with the goals of the organisation (goal congruence). This can be achieved by reward and incentive systems because managers will tend to focus on the activities that are rewarded. Research have shown that people will be more motivated by the potential of earning rewards than by the fear of punishment.

A managers total compensation package consists of salaries, benefits and an incentive compensation. Incentive compensation plans are divided into short-term and long-term plans.

Under a short-term plan, managers are usually paid in cash. The total amount that can be paid out to employees in a given year is called the “bonus pool” and relates to the overall profitability in a current year. Bonus pools can be established setting the bonus equal to a set percentage of the profits or base bonuses on profitability relative to the industry. Under the short-term plan, some organisations might follow a deferred compensation plan, which spreads out the payments to managers over a period of years. Advantages of this are that managers can estimate their cash income for the year and even after retiring, the manager will continue to receive payments for a number of years. However, the payments may not relate to the performance in the year it was earned.

With long-term plans, for an example, managers are usually given the option to purchase the company’s shares rather than receiving payments of cash. Although some rewards include cash payments, these are based on the increase in share price instead on profitability. Also some managers might be rewarded a specified number of shares when a specific long-term goal have been met. The advantage of this is that the manager has the ability to control the performance of