Organization wide incentive plans reward employees on the basis of the success of the organization over a specified time period. These plans seek to promote a culture of ownership by developing a senses of belongingness, cooperation and teamwork among all employees. There are three basic types of organization wide incentive plans; profit sharing, gain sharing and employees stock ownership plans.
Profit sharing is a scheme whereby employers undertake to pay a particular potion of net profits to their employees on compliance with certain service conditions and qualification. The purpose of introducing profits sharing schemes has been mainly to strengthen the loyalty of employees to the firm by offering them an annual bonus (over and above normal wages) provided they are on the service roles of the firm for definite period. The share of profit of the worker may be given in cash or in the form of shares in the company. These shares are called bonus shares. In India, the share of the worker is governed by the Payment of Bonus act.
1) The idea of sharing the profits inspires the management and the worker to be sincere, devoted and loyal to the firm .
2) It helps in supplementing the remuneration of workers and enables them to lead a rich life
3) It is likely to induce motivation in the workers and other staff for quicker and better work so that products of the firm are increased which in turn increases the share of workers therein.
4) Workers do not require close supervision as they are self-motivated to put in extra labour for the prosperity of the firm.
5) It attracts talented people to join the ranks of a firm with a view to share the profits.
1) Profit sharing is, in practice a fair weather plan. Workers may get nothing if the business does not succeed.
2) Management may dress up profit figures and deprive the workers of their legitimate share in the profits.
3) Workers tend to develop loyalty towards firms discounting their loyalty towards trade unions, thus, impairing the solidarity of trade unions.
4) Fixation of worker’s share in the profits of firm may prove to be a bonus of contention in the long run.
Comparative Analysis of three Gain sharing Plans
1) Philosophy theory
2) Primary goals
3) Subsidiary goals
4) Worker’s participation
5) Suggestion making
6) Role of supervisor
7) Role of a managers
8) Bonus formula
9) Frequency of pay out
10) Role of union
11) Impact on management style
1) Original single unit; share improvements people, capable of and willing to make suggestions, want to make ideas.
2) Productivity improvement.
3) Attitudes communication work, behaviours, quality cost reduction.
4) Two levels of committees screening (one) and production (many).
5) Formal systems
6) Chair of production committee
7) Direct participation in bonus committee assignments.
8) Sales / Payroll
10) Negotiated provisions ; membership on screening
1) Primarily economic incentive some reliance on employees’ participations
2) Improved productivity
3) Attitudes communication work behaviours, quality, and cost reduction.
4) Screening committee and production committee (sometimes).
5) Formal system
7) Idea coordinators : Evaluate suggestions, committee assignments
8) Bargaining unit payroll / Production value
10) Negotiated provisions screening committee membership.
1) Economic incentives increase performances.
2) Improved productivity
3) Attitudes, work behaviours
4) Bonus committee
8) Engineering standard x BPF* Total hours worked.
10) Negotiated provisions.
BPF = Base productivity factor.
Adapted from Christopher S Miller and Michael H Schuster (Summer 1987).
A gain sharing plan aims at increasing productivity or decreasing labour costs and sharing the resultant gains (usually a lump sum payment) with employees. It is based on mathematical formula that compares a baseline of performance with actual productivity during a given period. When productivity exceeds the base line an agreed upon savings is shared with the employees. Gain sharing is built around the idea that the involved employees will improve productivity through more effective use of organizational resources. Three major types of gain sharing plans are currently in use. Scanlon Plan, Rucher Plan and Improshare. Improshare stands for improved productivity through savings. This plan is similar to a piece rate except that it rewards all employees in an organization. Input is measured in hours and output in physical units. A standard is calculated and weekly bonuses are paid based on the extent to which the standard is exceeded. The employees and the organization each receive payment for 50 per cent of the improvements.
Unlike profit sharing plans which have deferred payments, gain sharing plans are current distribution plans. They are directly related to individual behaviour and are distributed on a monthly or quarterly basis. Gain sharing plans tend to increase the level of cooperation across workers and teams by giving them a common goal. Managers are not required to base their calculations on complex mathematical formulae, nor are they required to closely look into the specific contributions of individuals or independent teams. It is easier for both to formulate bonus calculations and to achieve employees’ acceptance of those plans. Gain sharing plans, however, protect low performance. Where rewards are spread across a large number of employees, poor performers may get rewards for non-performance at the cost of the bright performers. Gain sharing plans may fail due to other reasons as well such as: poorly deigned bonus formulae, lack of management support for employee participation increasing cost factors that undermine the bonus formula, poor communication, lack of trust or an apathy on the part of employees. To develop an organization wide incentive plan that has a chance to survive let alone succeed, a careful in depth planning must be done which would precede implementation. A climate of trust worthy labour management is also absolutely essential. The financial formula should be simple and should measure and reward performance with a specific set of measurable goals and a clear allocation method.
Employees Stock ownership plans:
Employees stock ownership plans originated in the USA in early 90s. Such plans have not gained popularity in India till recently, due to the absence of legal provisions in the companies act covering stock options. However, in 1988, the Government allowed stock options to software professionals recognizing the importance of retaining talent within the country.
Under employees stock option plan, the eligible employees are allotted company’s shares below the market price. The term stock option implies the right of eligible employees to purchase a certain amount of stock future at an agreed price. The eligibility criteria may include length of service contribution to the department / division where the employees work etc. The company may even permit employees to pay the price of the stock allotted to them in instalments or even advance money to be recovered from their salary every month. The allotted shares are generally held in trust and transferred in the name of the employees whenever he or she decides to exercise the option. The stock option empowers the employees to participate in the growth of the company as a part owner. It also helps the company to retain talented employees and make them more committed to the job.
Employees stock options are welcomed everywhere due to their in-built motivating potential. Some of the powerful benefits offered by Esops may be catalogued thus:
Stock options are a tremendous motivator because they directly link performance to the market place. The underlying rationale is to let employees add value to a company and benefit from it on the same terms as any other provider of risk capital.
Employees remain loyal and committed to the company. To become part owners, everyone has to stay for a while contribute their best and then share the resultant gains according to an agreed criteria. Stock options motivate people to give their best to the company because individual performances will translate into share price increase only if it is part of a larger collective effort.
By transforming your employees into a stockholder, the stock options foster a long term bond between the employee and the company. Employees begin to look at themselves as real owners in place of just paid servants of a company. ESOPs give employees a piece of the action so that they can share in the growth and profitability of their company. Everyone also loves the concept of employees’ ownership as a kind of People capitalism.
1) ESOP underscore the importance of team effort among employees.
2) Better industrial relations, reduced employees turnover, lesser supervision, increased dividend income etc, are other incidental benefits.
ESOPs have their critics as well who attack the method on the following grounds:
1) Only profitable companies can use the tool
2) Stock does not always reflect fundamentals
3) Falling share price could mean losses for employees.
4) The inability to cash in quickly can dampen interests.
5) Lack of transparency can earn accusations of favouritism
Excerpts from HRM book