Incentive compensation

Typical structures

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

The forms of remuneration recognised under law, collective labour agreements and practice are the following, as established in article 2099 of the Civil Code: ‘Remuneration of the employee may be established according to a time or piece rate and must be paid to the extent determined by the corporate rules, with the terms and procedures used in the place where the work is performed’.

The salary, determined for each sector by the collective bargaining agreement, may be in a mixed form, applying different forms of remuneration, provided these comply with the parameters given by article 36 of the Constitution.



Remuneration on a time basis (general type of compensation)

Proportional to the duration (time) of work - hour, week, month, year - and is regulated by collective labour agreements or agreements between the parties (or both). This is the most common form of remuneration. The worker is paid for the hours of work performed and for making their human resources available.

Remuneration on a piecerate basis

Commensurate with the results of work (and not time), this is regulated by collective labour agreements or agreements between the parties (or both). The piece rate is related to performance and not results. If the expected result is not achieved due to factors unrelated to the worker, the latter is in any case entitled to the fee agreed for the work performed or which could have been performed. The risk remains with the employer and the parties in any case establish a minimum agreed wage to be paid to the worker (‘mixed piece-rate work’).

Apprentice: prohibition of piece-rate remuneration (article 2131 of the Civil Code and article 42 of Legislative Decree No. 81/2015).

Profit-sharing; stock grants

Remuneration may be admitted, entirely or in part, in the form of profit or product sharing (article 2099 of the Civil Code), without prejudice to the fact that the worker may not be exposed to business risk. In any case, workers who are remunerated in this way must also be ensured remuneration that responds to the requirements of article 36 of the Constitution (minimum wage).

Stock options may be open to employees and non-executive directors.

Remuneration in kind

Pursuant to article 2099 of the Civil Code, a worker may also be remunerated entirely or in part with payment in kind. This is a type of remuneration which is complementary to traditional payment and may consist, for example, of: accommodation; or the provision of heating, electricity, water, clothing, etc; or discounts on the purchase of goods produced by the employer; or the provision of goods or services for free.


Remuneration is calculated on the basis of the business dealt with or concluded by the worker (or both). (Sometimes, reference is

made only to successful dealings.) This system of remuneration is widespread, mainly in the commercial sector, but is not however, prevalent, being accompanied by the payment of basic remuneration or minimum guaranteed wages.

Individual and collective extra allowance over minimum pay

Accessory element of remuneration exceeding the minimum levels of pay envisaged under the collective labour agreement. The amount and payment of the collective extra allowance are the result of the ‘weight’ of the contractual power of the individual worker or the merits achieved by them during the performance of their working activity.

Fringe benefits

Fringe benefits are not part of a minimum remuneration, but in recent years have assumed growing importance. Part of the extra allowance compensation may be paid by the issue of ‘benefits’. The assignment of fringe benefits falls within the wider concept of incentives (company car, granting of mortgages at favourable rates, housing, membership of sports or recreational clubs, assignment of mobile phones, personal computers, tablets and credit cards, etc).


Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

Remuneration is deemed as being any fee which has the nature of being obligatory, continuous, determined or determinable (cf. Supreme Court No. 2084 of 17 July 1973 and Supreme Court No. 1019 of 27 February 1978).


Remuneration is a right of workers envisaged under the employment contract. In other words, when the issue of payment is imposed by law or a binding collective agreement or has been envisaged in the agreement between the parties, it is included in remuneration and represents an integral element thereof to all effects and purposes.

Determination or determinability

A contract must contain parameters which make it possible to qualify and quantify the amount of the remuneration.


The continued issue of a given payment is sufficient, even if the actual amount varies, for it to be considered an element of remuneration.

The employer acts as a withholding agent, pursuant to articles 23 and 24 of the Presidential Decree No. 600/1973.

The employer is obliged to withhold taxes owed by the worker, which have to be calculated on the income of the latter (articles 23 et seq of Presidential Decree No. 600/1973). The withholding agent also provides for paying the withholding tax deducted to the Revenue Department.

The withholding agent must withhold tax by way of partial payment on the sums (wages, salary and benefits, etc) and values paid in each remuneration period. The remuneration period constitutes a practical criterion for measuring the tax to be deducted so that it coincides as far as possible with when the income is received, in view of the balancing of taxation at the end of the year or at the end of the employment relationship, if this occurs first.

Withholding tax is applied to the overall amount of all the sums and values received by the withholding agent in the remuneration period (month, fortnight, week or day) in relation to the employment relationship as established pursuant to the Consolidation Law on Income Tax (Presidential Decree No. 917/1986). To this end, for each remuneration period, the withholding agent calculates all the sums and values subject to tax related to the period itself according to the cash criterion, excluding additional monthly payments and other remuneration (eg, severance indemnity) of the same kind for which separate procedures are envisaged.

The income earned on shares offered to the employee is not considered income from work under some specific circumstances (article 51, paragraph 2, letter (g) of Presidential Decree No. 917/1986 (Single Text of Income Taxes (TUIR)):

(g) the value of the shares offered to the generality of employees for a sum not exceeding an overall [€]2,065.83 in the tax period, provided the stock is not repurchased by the issuing company or the employer or in any case transferred before at least three years have passed since it was received; if stock is transferred before such period the sum that did not form part of the income at the time of receipt is subject to taxation in the tax period in which the stock is transferred.)


Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

Stock options, performance-vested stock, options or similar devices are a type of remuneration generally for executives and middle management but extendible to all the type of employees. The performance period for a long-term incentive typically runs between three, five or seven years, with the executive not receiving any pay from the incentive until the end of the performance-vesting period. Long-term incentive goals vary by company but the most prevalent are focused on total return to shareholders, earnings per share and other return measures, such as return on assets. Like annual incentives, long-term incentives typically have a target and a stretch component to encourage executives and middle management to achieve superior performance.

The income earned on options and vested stock options by the employee is considered income and it is subject to withholding taxes as normal remuneration. In any case, the law provides exemption from social security obligations.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

Not applicable (see question 11).

Recurrent discretionary incentives

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

Fringe benefits that are not part of a minimum remuneration and the participation in wider welfare plans in recent years have assumed growing importance also through collective bargaining agreements. They consist in the issue of ‘benefits’, services and insurance packages which may have significant economic value for the employee in place of money remuneration. The assignment of fringe benefits and the participation in wider welfare plans fall within the broader concept of incentives (company car, granting of mortgages at favourable rates, housing, membership of sports or recreational clubs, assignment of mobile phones, personal computers, tablets, credit cards, transport services and insurances, etc). The economic value of the use of the asset or service - apart from the effective use made of it by the employee - assumes a remunerative nature when this is envisaged in the employment contract signed with the employee.

Such arrangements also benefit from incentive tax measures so they are not rebuttable if they are provided in compliance to the terms and limits established by the law.

Elements that the Consolidation Law on Income Tax (article 51(2)) expressly rules out (also establishing relative limits) are excluded from employment income, namely:

  • welfare and social security contributions;
  • the provision of food and services, including in canteens organised directly by the employer or managed by third parties; benefits and allowances paid to workers on construction sites and other working facilities of a temporary nature, or production units located in areas where facilities or catering services are lacking;
  • the provision of collective transport services for all employees or for categories of employee, even if entrusted to third parties, including those providing public services; sums issued or reimbursed by the employer to all the employees or to categories of employees - also for the family - for the purchase of local or regional transport subscriptions;
  • reversionary fees;
  • the use (also by the family of the employee) of works or services for educational, instructive and recreational aims, and for social and health assistance; sums issued by the employer for assistance services to elderly or non-self-sufficient family members; sums issued by the employer for services, and insurances, having as their object the risk of non-self-sufficiency in carrying out the actions of daily life;
  • monies, services and benefits provided by the employer to all employees or to categories of employee for attendance at nurseries and summer camps by family members, as well as for scholarships for the same;
  • stock purchase plans (under specific limits - see question 10);
  • sums withheld for deductible charges and sums issued to cover deductible expenses;
  • croupiers’ tips; and
  • remuneration arising from the worker exercising their right to waive contribution credits regarding general compulsory insurance for invalidity, old age and surviving heirs of employees, and alternative forms thereof, for the period after the first deadline useful for retirement once the minimum requirements under current regulations have been accrued.

Goods in kind (fringe benefits) count towards income according to particular laws that govern their exemption from tax up to a certain limit. In particular, conventional values are applied for establishing the value of a car, loans, accommodation and railway transport.

Effect on other employees

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

The principle of equal pay for equal work in the same enterprise does not exist in the Italian legal system. This means that workers who perform the same duties may be paid a different wage, while employers must respect the equitable wage and the guaranteed minimum wage as provided by the Workers’ Statute (article 16 of Law No. 300/1970), and the minimum wage level provided for each level of each sector by collective bargaining agreements.

Mandatory payment

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

Not applicable.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

Part of the remuneration may be admitted by the parties in the form of profit or product sharing (article 2099 of the Civil Code - see question 9). Only this part of the remuneration (not the minimum wage that responds to the requirements of article 36 of the Constitution) could be conditioned by the parties on continuing employment and submitted to the rules and limits for payment identified in the remuneration agreement (usually attached to the employment contract).