Rewards or penalties designed to induce one set of economic agents to act in such a way as to produce results that another economic agent wants. As rewards for good results, incentives can include higher pay, better working conditions, better job security, better promotion prospects, or prestige. As penalties for poor results, incentives may take the form of lower pay, worse working conditions, poorer promotion prospects, demotion or sacking, or loss of reputation. Incentives may be applied in response to actual results, such as and disciplinary record. Incentives cannot be based on inputs or outputs unobservable by management. See also export incentives; incentive contract; investment incentives.
Reference: Oxford Press Dictonary of Economics, 5th edt.