Performance linked incentives2
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This document discusses common group and organizational incentive plans including gain sharing plans, profit sharing plans, cafeteria plans, and employee stock ownership plans (ESOPs). Gain sharing plans reward employees when productivity or other performance metrics improve above a target level. Profit sharing plans provide additional compensation to employees when company profits are high. Cafeteria plans allow employees some choice in their benefits. ESOPs grant employees ownership stakes in the company through stock options or shares.
Performance linked incentives2
- 2. Common group/organizational incentive plansGroup/organization wide incentive plans involve cooperation among employees, management and union in order to achieve broader objectives such as organization wide reduction in manpower, materials and supply cost, strengthening of loyalty to the organization, harmonious IR, and decreased turnover and absenteeism. Common Group/organizational incentive plans as follows:
- 3. Gain sharing planIsn't it a compensation system that places a big carrot in front of employees in the form of a financial incentive? Isn't it the same as profit sharing that pays an annual bonus to workers when times are good? Is it about people working harder in order to make a little more money?
- 4. Gain sharing planThe Gain sharing concept dates back to the 1930's when a labour leader, Joe Scanlon, preached that “the worker” had much more to offer than a pair of hands.
- 5. Gain sharing planGainsharing may be best described as a system of management in which an organization seeks higher levels of performance through the involvement and participation of its people. As performance improves, employees share financially in the gain. It is a team approach; generally all the employees at a site or operation are included.
- 6. Gain sharing planPurpose: To drive performance of an organization by promoting awareness, alignment, teamwork, communication and involvement. Application: The plan commonly applies to a single facility, site or stand-alone organization.Measurement: Payout is based on operational measures (productivity, quality, spending and service).Funding: Gains and resulting payouts are self-funded based on savings generated by improved performance.Payment Target: Payouts are made only when performance has improved over a historical standard or target. Employee Eligibility: Typically all employees at a site are eligible for plan payments.Payout Frequency: Payout is often monthly or quarterly.
- 7. Gain sharing planForm of Payment:Payment is cash rather than deferred compensation. Many organizations pay via separate check to increase visibility. Method of Distribution:Typically all employees receive the same percent payout or rupee per hour bonus.Plan Design and Development:Employees often are involved with the design and implementation process.Communication: A supporting employee involvement and communication system is an integral element of gainsharing and helps drive improvement initiatives.Pay for Performance:Gains are generated only by improved performance over a predetermined base level of performance. Therefore, gainsharing is viewed as a pay-for-performance initiative. Impact on Behaviors: Gainsharingreinforces behaviors that promote improved performance. It is used as a tool to drive cultural and organization change.Impact on Attitudes: Gainsharing heightens the level of employee awareness, helps develop the feeling of self worth, and builds a sense of ownership and identity to the organization.
- 9. Gain sharing planAs an example of how gain sharing works, consider a company producing rigid and steering differential axles for tractors. From its records, the company determined that every $1,000,000 of good product output required 10,000 worker hours. Under gain sharing, the next $1,000,000 of axle output and shipment was produced with only 9,000 hours. If the average wage rate is $10 an hour, the 1,000 hours saved are worth $10,000. That is a gain to be shared equally between the workforce and company.
- 10. Gain sharing planThe involvement system provides a structured way for employees to become more active in the business. It helps to foster communications, up, down, and throughout the organization.Gainsharing combines two of the most active areas in the human resources field: pay for performance and employee. There are two major issues in developing a successful gainsharing plan: the bonus formula and the employee involvement structure. Both pieces are needed and are mutually reinforcing. The bonus rewards performance and answers the question, "What's in it for me?" The involvement structure establishes a vehicle for employees to "work smarter" and improve information sharing. Higher levels of involvement lead to new behaviors and improved organization performance. Improved performance results in a financial bonus, which leads to higher involvement. This mutually reinforcing concept drives continuous improvement.
- 11. Profit sharing planOne of the first documented profit sharing plans in the United States was introduced in 1794 at New Geneva, PA, Glass Works.Profit sharing plans are based on 2 premises:the promise to provide additional economic rewards when profits of the organization permit it.the implied acceptance of all employee contributions that will advance the profit goal.
- 12. Profit sharing planWhen profits are up, “I get more.” If profits are down, there’s no consequence. Companies that install these plans hope to enable employees to share in the organization’s success, to motivate workers to improve profits, and in turn to act in the best interest of the company.
- 13. Profit sharing planThe compensation can be stocks, bonds, or cash, and can be immediate or deferred until retirement.The share of profits paid to the management, or to the Board of Directors is sometimes called the tantième.
- 14. Cafeteria planCafeteria plan/flexible benefit plan is a system under which each employee has some choice as to the form and timing of all or a portion of total compensation. It is like ‘choose your own reward plan’.
- 15. ESOPSStock options are a right to purchase a specified number of shares of a company’s stock at a specified price for a specified period of time. Companies use stock options as a method of long-term compensation.
- 16. ESOPSThe primary objective of stock-based compensation arrangements is to achieve alignment between the goals of management and a company's stockholders. The intention is to encourage management to act in a manner that will increase the stock's market value. In addition, as stock options generally vest over a number of years, stock compensation also serves as a mechanism to retain and reward top employees.
- 17. ESOP scheme“Our ESOP scheme has been a tremendous success, both in terms of human resource organizational growth. Today, we are one of those rare IT companies where the attrition rate is a very low 2%. In fact, we are probably one of its kind in the industry with 22.32% of the company being held by employees,” says C K Shastri, Managing Director, Intense Technologies.
- 18. ESOPS IN ADITYA BIRLA GROUPFor the first time in its 60 year old history, the $10 billion Aditya Birla Group has announced an ESOP 2006 across 4 of its group companies. Grasim Industries, Aditya Birla Nuvo and UltraTech Cement. The board of the 4 companies met to decide on granting stock options to eligible employees and compensation committees have been set in place for each of the companies.
- 19. GlossarySalary compression- A salary inequity problem generally caused by inflation, resulting in longer term employees in a position earning less than workers entering the firm today.Gross salary-total of your earningNet salary-amount credited to your account after deduction.Split award method-breaks bonus into 2 parts. The manager actually gets 2 separate bonuses, one based on his/her individual effort and one based on the organization’s overall performance.
- 20. GlossaryWage differential-The difference in wages between workers with different skills in the same industry or between those with comparable skills in different industries or localities.Severance pay-Pay and benefits an employee receives when they leave employment at a company.Merit pay-Pay increase based on goals or achievements set by an employer, rather than a pay rated based on union contract or a defined pay scale for a position (pay for performance).
- 21. GlossaryFringe Benefit: Anything in addition to Guaranteed Cash Compensation. E.g.: Conveyance, Housing, Loans, Credit Card, Telephone, Insurance Coverage, Club Membership etc. are all Fringe Benefits. Perquisites are those facilities which the position carries. Indirect workers: Workers not directly concerned with production. E.g.: HR
- 22. GlossaryReverse incentive plan: Penalty for poor performance rather then reward for good.Cost of living Index: A theoretical price Index that measures relative cost of living over time.A signing bonusis a sum of money paid to a new employee by a company as an incentive to join that company.
- 23. GlossaryVariable pay is employee compensation that changes as compared to salary which is paid in equal proportions throughout the year. Variable pay is awarded in a variety of formats including profit sharing, bonuses, holiday bonus, goods and services such as a company-paid trip etc.
- 24. “Control is not leadership; management is not leadership; leadership is leadership.” -Dee Hock