ORGANISATION WIDE INCENTIVE PLANS

Khushbu BhardwajIMBA/25013/11

ORGANISATION WIDE INCENTIVE PLANSOrganization wide incentive plans rewardEmployees on the basis of the success of theorganization over a specified time period.

These plans seek  to promote a culture ofOwnership by developing a sense of

Belongingness cooperation & Teamwork among all employees.

ORGANISATION WIDE INCENTIVE PLANS In which all or most employees can

participate.

Which tie the reward to some measure of company wide performance.

Also called “variable pay plans” and include Profit sharing Employee stock ownership Scanlon/gain sharing plans

PROFIT SHARING PLANS

Whereby employees receive a share of the firms annual profit on compliance with certain service conditions and qualifications.

The share of profit of the worker may be given in cash or in the form of shares in the company.

Types Cash plan Lincoln incentive system Deferred profit sharing system

1. Cash plan

In cash plan the firm simply distributes apercentage of profits (usually 15-20%) as

profitshares at regular intervals.

2. Deferred profit-sharing plans:

The firm places a pre determined portion of profits

in each employee’s account under a trustee'ssupervision.

3. Lincoln incentive system

First instituted at the lincoln electric company of Ohio.

Employees work on a guaranteed piecework basis, and the firm distributes total annual profits each year among employees based on their merit rating.

The plan also includes a suggestion system that pays individual workers reward for savings resulting from their suggestions.

The plan has been quite successful.

EMPLOYEE STOCK OWNERSHIP PLAN An employee stock ownership plan (ESOP) is an

employee-owner program that provides a company's workforce with an ownership interest in the company.

In an ESOP, companies provide their employees with stock ownership, often at no up-front cost to the employees.

The firm generally makes these contributions annually in proportion to total employee compensation. (with a limit of 15% of compensation).

ESOP

A corporation contributes shares of it’s own stock to a trust in which additional contributions are made annually.

The trust holds the stock in individual employee accounts and distributes the stocks to the employees on retirement or separation from service, assuming the person has worked long enough to earn the ownership of the stock.

ADVANTAGES:

Company gets the tax deduction.

Firm may borrow against employee stock held in trust.

Helps shareholders diversify the assets and purchase other securities.

Encourage employees to develop a sense of ownership.

ESOP IN INDIA The companies Act 1956 permits

employees holding shares as well as sweat equity.

Similarly, the securities and exchange board of India has issued guidelines for issuing and purchasing plans of ESOPs.

SCANLON AND OTHER GAIN SHARING PLANS The idyllic/Peaceful state:

synchronize company’s goal with employee’s goals, ensure two sets of goals overlap, by pursuing his/her goal employee pursues employer’s goal as well.

Developed in 1937 almost 70 years old this plan is remarkably progressive technique “SCANLON” is one of the most popular to achieve this state.

It has 5 basic features.

1. Cooperation - no us and them attitude.

2. Identity - clearly articulate mission or purpose.

3. Competence - careful selection and training.

4. Involvement – improvement suggestions.

5. Sharing of benefits formula - if a suggestion is implemented and successful, all employees usually share in 75% of the savings.

Assume that the normal monthly ratio of payroll costs to sales is 50% (thus, if sales are 600, payroll costs should be 300).

Assume the firm implements suggestions that results in payroll costs of 250 in a month when sales were 550, and payroll costs should have been 275 (50% of sales).

The savings attributable to these suggestions is 250 (275-250).

workers should typically share in 75% of this (187.5)

while 62.5 would go to the firm.

In practice, the firm sets aside a portion, usually one quarter of the 187.5, for months in which payroll costs exceeds the standards.

GAINSHARING

The scanlon plan is the early version of what we call today a gainsharing plan.

Gainsharing is a program that returns cost savings to the employees, usually as a lump-sum bonus. It is a productivity measure.

GAINSHARING PLANS

Gainsharing is an incentive plan that engages many or all employees in a common effort to achieve a company’s productivity objectives, with any resulting cost savings gains shared among employees and the company.

Other popular gainsharing plans include the Rucker and Improshare plans.

The basic difference among these plans is the formula employers use to determine employee bonuses.

the scanlon formula divides payroll expenses by total sales (or sometimes total sales plus increase in inventory).

The bonus basically depends on the difference between how many labour hours the company should have used for the period, compared with how many it actually used.

IMPLEMENTING A GAINSHARING PLAN

Establish general plan objectives

Choose specific performance measures

Decide on a funding formula

Decide on a method for dividing and disturbing the employees’ share of the gains

Choose the form of payment

How often to pay the bonuses

Develop the involvement system

Implement the plan

EXAMPLE

A supplier wants to boost quality, doing so would translate into fewer customer return, less scrap and rework, and therefore higher profits.

Historically, $10 million in output results in $200,000 (2%) scrap and rework.

The company tells it’s employees that if next month’s production results in only 1 % scrap, returns and rework, the 1% saved would be a gain, to be split 50/50 with the workforce, less a small amount of for reserve for months in which scrap exceeds 2%.

This has helped improve productivity and reduce grievances.

AT-RISK VARIABLE PAY PLAN

Also known as “Risk-sharing Plans”.

Put some portion of the employee’s pay at risk.

Then if employee meet or exceed their goals, they earn back, the portion plus an incentive.

If they fail, they forgo some of the pay.

One DuPoint division set employee's at risk pay at 6%.

TCS

Largest software company in India.

Follows the Economic Value Add (EVA) method to determine the variable part of employees’ compensation.

This method ties the compensation to the fortunes of the company.

If TCS shows positive EVA the employees get increased compensation, which is in proportion to the value created.

In 2007-2008 due to falling US economy TCS missed an EVA target and consequently all employees had to take a reduction in their variable pay in order to pay back the gap

THANK YOU.You may put forth your suggestions and questions.