Corporations' compensation practices have recently received increased scrutiny from investors, lawmakers, auditors, and regulators. Incentive pay packages, especially at financial firms, have been described as excessive and out of control. However, incentive plans remain a critical mechanism for firms to attract, reward, and motivate employees to work in ways to maximize firm value. Additionally, compensation costs are a significant expenditure that firms must continually manage and monitor. This article discusses why incentive compensation is important to firm management, barriers to effective incentive compensation, and suggestions for how CEOs, CFOs, and boards of directors can improve the link between incentives and the health of the firm. © 2012 Wiley Periodicals, Inc.