Updated June, 2016
File C4-42

Wage and Incentive Agreement

A Wage and Incentive Agreement is one of your farm business choices. It can be used during the testing stage when the younger party first comes into the business. The testing stage is part of the farm business transfer process that is used to determine if the younger party really wants to farm and if all parties can get along.

In a Wage and Incentive Agreement the younger party usually has no money invested in the business. He/she receives a wage plus (possibly) housing or other fringe benefits. In addition to the wage, he/she receives compensation through an incentive plan if the business does well. Check requirements for Social Security tax and income tax withholding to see how such income is treated for tax purposes.

Key Considerations

Keep the following points in mind in developing an incentive program.

  • The incentive is not a substitute for wages but an addition to a fair and equitable wage.
  • It should be large enough to provide a proper incentive. As a rule, it should average 15 to 20 percent of the base wage.
  • The incentive should be based on performance levels that are observable, measurable, and controllable by the employee.
  • The objective of the incentive is to motivate employees to improve their performance level. The incentive payment should be paid promptly and regularly.
  • The incentive plan should be reviewed regularly and modified as the employee gains skills or is assigned new duties and responsibilities.

Types of Incentives

Labor vs. Management
Incentives may differ depending on whether the employee provides only labor or labor plus management to the operation. With a managerial incentive, the employee has control over much of the day-to-day decisions. Labor incentives can be divided further into skilled or semi-skilled labor.

Physical vs. Economic
Incentives can be based on physical production (bushels of corn or number of pigs), or a share of the income.


Gross vs. Net

Income incentives can be further divided into incentives that are based on gross income or net income. Gross income incentives are usually easier to figure, but net income incentives tie the incentive to profits.

Farm vs. Enterprise
Incentives can be based on the entire farm business or an individual enterprise such as hogs or dairy. Whether an incentive is based on the performance of the whole farm or just one enterprise depends on the employee's responsibilities.

In this example, the employee receives $20,000 in wages plus $3,000 in fringe benefits for a total of $23,000. The employee receives an additional $3,000 whole farm incentive and a $1,500 livestock incentive for a total of $4,500 in incentives. Total compensation is $27,500.

examples of incentive/bonus arrangements


Don Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu


Don Hofstrand

retired extension value added agriculture specialist
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