Pay For Organizational Plan

Two important ways organizations measure their performance are in terms of their profits and their stock price.

In a competitive marketplace, profits result when an organization is efficiently providing products that customers want at a price they are willing to pay. Stock is the owners' investment in a corporation; when the stock price is rising, the value of that investment is growing.

Rather than trying to figure out what performance measures will motivate employees to do the things that generate high profits and a rising stock price, many organizations offer incentive pay tied to those organizational performance measures.

The expectation is that employees will focus on what is best for the organization.

1. Profit Sharing

Under profit sharing, payments are a percentage of the organization's profits and do not become part of the employees' base salary. Organizations use profit sharing for a number of reasons.

It may encourage employees to think more like owners, taking a broad view of what they need to do in order to make the organization more effective.

They are more likely to cooperate and less likely to focus on narrow self-interest. Also, profit sharing has the practical advantage of costing less when the organization is experiencing financial difficulties.

If the organization has little or no profit, this incentive pay is small or nonexistent, so employers may not need to rely as much on layoffs to reduce costs.

An organization setting up a profit-sharing plan should consider what to do if profits fall. If the economy slows and profit-sharing payments disappear along with profits, employees may become discouraged or angry.

One way to avoid this kind of problem is to design profit-sharing plans to reward employees for high profits but not penalize them when profits fall.

This solution may be more satisfactory to employees but does not offer the advantage of reducing labour costs without layoffs during economic downturns.

OBJECTIVES OF PROFIT-SHARING PLANS

The primary objectives of profit-sharing plans are to:Improve productivityRecruit or retain employeesImprove product/service qualityImprove employee morale

2. Employee Stock Ownership Plans (ESOPs)/ Employee Stock Option

An employee share ownership plan ("stock option" or "stock ownership", abbreviated to "ESOP") is the practice of companies giving staff members shares in their company as part of their salary and "stock option" plan converts an employee in to a shareholders of an organisation.

Today, employee stock option plan has become an employee retention tool/strategy for the organisations, especially in the information technology sector.

Social networking companies like, Facebook offered "stock option" to its employees those who stick to the company for a period of two years. similarly, Twitter, Google and Amazon have included stock option in the compensation package of their employees.

Management experts feel that stock option is showing positive influence on retention of employees and termed it as a "Golden Handcuff ".

The stock option is the most popular long-term incentive. A stock option plans grant to employees the right to purchase a specific number of shares of company stock at a specific price during a period of time.

The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted.

The assumption is that the price of the stock will go up, rather than go down or stay the same. Several trends have increased the attractiveness of stock options as a long-term executive incentive and retention tool.

example:-Suppose that in 2009 a company's employees received options to purchase the company's stock at $10 per share.

The employees will benefit if the stock price rises above $10 per share, because they can pay $10 for something (a share of stock) that is worth more than $10.

If in 2012 the stock is worth $30, they can exercise their options and buy stock for $10 a share.

If they want to, they can sell their stock for the market price of $30, receiving a gain of $20 for each share of stock. Of course, stock prices can also fall. If the 2012 stock price is only $8, the employees would not bother to exercise the options.

An Employee Share Option Plan (ESOP) is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for, thereby increasing their commitment, loyalty, and effort.

It is an equity based deferred compensation plan. Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price over a period of time.

Important goals of the plan are: to attract best talented employees.Acts as a retention tool.to motivate employees to act in the best interest of the organisation as a whole; to enhance employee identification with the organisation

ADVANTAGES AND DISADVANTAGES OF ESOPS

Establishing an ESOP creates several advantages. The major one is that the firm can receive favorable tax treatment of the earnings earmarked for use in the ESOP. Second, an ESOP gives employees a piece of the action so that they can share in the growth and profitability of their firm.

As a result, employee ownership may be effective in motivating employees to be more productive and focused on organizational performance. In one survey of over 1,100 ESOP companies, about 60% said productivity had increased, and 68% said financial performance was higher since converting to an ESOP.

Almost everyone loves the concept of employee ownership as a kind of peoples capitalism. However, the sharing also can be a disadvantage because

employees may feel forced to join, thus placing their financial future at greater risk. Both their wages or salaries and their retirement benefits depend on the performance of the organization. This concentration is even riskier for retirees because the value of pension fund assets also depends on how well the company does.

Another drawback is that ESOPs have been used as a management tool to fend off unfriendly takeover attempts. Holders of employee-owned stock often align with management to turn down bids that would benefit outside stockholders but would replace management and restructure operations.

Surely, ESOPs were not created to entrench inefficient management. Despite these disadvantages, ESOPs have grown in popularity.

Questions For Review

1.What are the objectives of profit sharing plan?2.What is Employee Stock Ownership Plan (ESOPs)3.State the important goals of ESOP4.State the advantages and disadvantages of ESOPs