welcome to the class of hrm. pay for performance & financial incentives prof. hiteshwari jadeja

WELCOME TO THE CLASS OF HRM

PAY FOR PERFORMANCE & PAY FOR PERFORMANCE & FINANCIAL INCENTIVESFINANCIAL INCENTIVES

PROF. HITESHWARI JADEJAPROF. HITESHWARI JADEJA

Incentive Pay TerminologyIncentive Pay Terminology• Pay-for-Performance PlanPay-for-Performance Plan

Ties employee’s pay to the employee’s performanceTies employee’s pay to the employee’s performance

• Variable Pay PlanVariable Pay Plan Is an incentive plan that ties a group or team’s pay to some Is an incentive plan that ties a group or team’s pay to some

measure of the firm’s (or the facility’s) overall profitabilitymeasure of the firm’s (or the facility’s) overall profitability Example: profit-sharing plansExample: profit-sharing plans

May include incentive plans for individual employeesMay include incentive plans for individual employees

Remuneration & Rewards

Financial Non-Financial

DIRECT(cash)

• Salaries• Incentives• Bonuses

INDIRECT(benefits)• Insurance• Holidays• Medical and health• Child care• Employee assistance

JOB• Interesting work• Challenge• Responsibility• Recognition• Advancement

ENVIRONMENT• Good policies and practices• Competent supervision• Congenial co-workers • Safe and healthy work environment• Fair treatment

Components of Employee Remuneration

Motivation, Performance, and Motivation, Performance, and PayPay•IncentivesIncentives

Financial rewards paid to workers whose Financial rewards paid to workers whose production exceeds a predetermined standard.production exceeds a predetermined standard.

•Frederick TaylorFrederick Taylor Popularized scientific management and the use Popularized scientific management and the use

of financial incentives in the late 1800s.of financial incentives in the late 1800s.

How you would apply five motivation How you would apply five motivation theories in formulating an incentive theories in formulating an incentive plan?plan?

Needs and MotivationNeeds and Motivation• Abraham Maslow’s Hierarchy of NeedsAbraham Maslow’s Hierarchy of Needs

– Five increasingly higher-level needs:Five increasingly higher-level needs:

• physiological (food, water, sex)physiological (food, water, sex)

• security (a safe environment)security (a safe environment)

• social (relationships with others)social (relationships with others)

• self-esteem (a sense of personal worth)self-esteem (a sense of personal worth)

• self-actualization (becoming the desired self)self-actualization (becoming the desired self)

– Lower level needs must be satisfied before higher level Lower level needs must be satisfied before higher level needs can be addressed or become of interest to the needs can be addressed or become of interest to the individual.individual.

Motivation and IncentivesMotivation and Incentives•Herzberg’s Hygiene–Motivator theory Herzberg’s Hygiene–Motivator theory

Hygienes (extrinsic job factors)Hygienes (extrinsic job factors) Inadequate working conditions, salary, and incentive Inadequate working conditions, salary, and incentive

pay can cause dissatisfaction and prevent pay can cause dissatisfaction and prevent satisfaction.satisfaction.

Motivators (intrinsic job factors)Motivators (intrinsic job factors) Job enrichment (challenging job, feedback, and Job enrichment (challenging job, feedback, and

recognition) addresses higher-level (achievement, recognition) addresses higher-level (achievement, self-actualization) needs.self-actualization) needs.

The best way to motivate someone is to The best way to motivate someone is to organize the job so that doing it helps satisfy organize the job so that doing it helps satisfy the person’s higher-level needs.the person’s higher-level needs.

Motivation and Incentives Motivation and Incentives (continued)(continued)•Demotivators and Edward DeciDemotivators and Edward Deci

– Intrinsically motivated behaviors are motivated Intrinsically motivated behaviors are motivated by the underlying need for competence and by the underlying need for competence and self-determination. self-determination.

– Offering an extrinsic reward for an intrinsically-Offering an extrinsic reward for an intrinsically-motivated act can conflict with the acting motivated act can conflict with the acting individual’s internal sense of responsibility.individual’s internal sense of responsibility.

– Some behaviors are best motivated by job Some behaviors are best motivated by job challenge and recognition, others by financial challenge and recognition, others by financial rewards.rewards.

Motivation and Incentives Motivation and Incentives (continued)(continued)• Victor Vroom’s Expectancy TheoryVictor Vroom’s Expectancy Theory

– Motivation is a function of:Motivation is a function of:

• Expectancy:Expectancy: that effort will lead to performance. that effort will lead to performance.

• Instrumentality:Instrumentality: the connection between the connection between performance and the appropriate reward.performance and the appropriate reward.

• Valence:Valence: the value the person places on the reward. the value the person places on the reward.

– Motivation = E x I x VMotivation = E x I x V

• If any factor (E, I, or V) is zero, then there is no If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward.motivation to work toward the reward.

• Employee confidence building and training, accurate Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired appraisals, and knowledge of workers’ desired rewards can increase employee motivation.rewards can increase employee motivation.

Motivation and Incentives Motivation and Incentives (continued)(continued)• Behavior Modification/Reinforcement TheoryBehavior Modification/Reinforcement Theory

– B. F. Skinner’s PrinciplesB. F. Skinner’s Principles

• To understand behavior one must understand the To understand behavior one must understand the consequences of that behavior.consequences of that behavior.

• Behavior that leads to a positive consequence Behavior that leads to a positive consequence (reward) tends to be repeated, while behavior that (reward) tends to be repeated, while behavior that leads to a negative consequence (punishment) tends leads to a negative consequence (punishment) tends not to be repeated.not to be repeated.

• Behavior can be changed by providing the properly Behavior can be changed by providing the properly scheduled rewards (or punishments).scheduled rewards (or punishments).

How Incentives Sometimes “Work”How Incentives Sometimes “Work”

PAY FOR PERFORMANCE

Business history is littered with firms that got what they paid for. Sears had a very clear pay for performance system in which mechanics were paid bonuses as a percentage of repair receipts. Receivables went up, the company was happy because of higher sales, mechanics got higher pay, and 41 states indicted Sears for fraud.

Do Incentive Plans Work?Do Incentive Plans Work?

•Successful Plans Successful Plans Use important organizational metrics by which Use important organizational metrics by which

to measure employee performanceto measure employee performance Find the right incentive payout. Payout Find the right incentive payout. Payout

formulas should be simple and formulas should be simple and understandable.understandable.

Are continuously communicated to employees Are continuously communicated to employees to establish a clear link between performance to establish a clear link between performance and payout.and payout.

Effectively measure employee output and Effectively measure employee output and reward exceptional employee performancereward exceptional employee performance

Do Incentive Plans Work?Do Incentive Plans Work?

•Why Incentive Plans Fail:Why Incentive Plans Fail: They fail to meet employee expectations for They fail to meet employee expectations for

pay gains.pay gains. There is confusion about incentive payment There is confusion about incentive payment

calculations due to poor design and calculations due to poor design and implementation of the plan.implementation of the plan.

Employees do not have the capability to Employees do not have the capability to change their performance levels.change their performance levels.

The organization environment does not The organization environment does not support plan.support plan.

Employee Opposition to Incentive PlansEmployee Opposition to Incentive Plans

• Production standards/goals are set unfairly.Production standards/goals are set unfairly.• Incentive plans are really “work speedup.”Incentive plans are really “work speedup.”• Incentive plans create competition among Incentive plans create competition among

workers.workers.• Increased earnings result in tougher standards.Increased earnings result in tougher standards.• Payout formulas are complex and difficult to Payout formulas are complex and difficult to

understand.understand.• Incentive plans cause friction between Incentive plans cause friction between

employees and management.employees and management.

Advantages of IncentivesAdvantages of Incentives

•Motivation to perform better•Enhanced employee earnings•Reduced cost of production• Increased production capacity•Reduced supervision, reduced accidents, reduced

absenteeism•Case of Rail Factory, Bangalore

DisadvantagesDisadvantages• Quality is dentedQuality is dented• Introduction of new machines and methods Introduction of new machines and methods

opposedopposed• Jealousies creep inJealousies creep in• Difficulty in setting ratesDifficulty in setting rates• Difficulty in setting standardsDifficulty in setting standards• Case of Premier Automobiles, MumbaiCase of Premier Automobiles, Mumbai• Ethically incorrect to pay more when normal Ethically incorrect to pay more when normal

wages are already paidwages are already paid• Standards are perceived to be ceilingsStandards are perceived to be ceilings• Incentives only remove dissatisfaction but may Incentives only remove dissatisfaction but may

not offer satisfactionnot offer satisfaction

Types of Incentive PlansTypes of Incentive Plans

Individual Group/Team Enterprise/Organization

Piecework Team Profit sharing

Bonuses Gainsharing•Scanlon plan•Improshare•Rucker plan•Earnings-at-risk

Employee stock ownership plans (ESOPs)

Merit pay Stock options

Lump sum merit pay

Incentive awards

Sales incentives

Executive compensation

Individual Incentive PlansIndividual Incentive Plans

• Piecework PlansPiecework Plans The worker is paid a sum (“piece rate”) The worker is paid a sum (“piece rate”)

for each unit he or she produces.for each unit he or she produces.

Straight piecework Straight piecework pays a fixed sum pays a fixed sum of money for each unit of production of money for each unit of production completed. For example: Ballpark completed. For example: Ballpark workers selling peanuts and soda workers selling peanuts and soda get $1 for each bag of peanuts and get $1 for each bag of peanuts and soda sold.soda sold.

Standard hour plan Standard hour plan pays the worker pays the worker a premium equal to the percent by a premium equal to the percent by which his or her performance which his or her performance exceeds a standard.exceeds a standard.

Computing the Piece Rate—Another ExampleComputing the Piece Rate—Another Example

hourper units 5 unit)per time(standard minutes 12

hour)(per minutes 60=

unitper $2.55 hour)(per units 5

rate)(hourly $12.75=

Pros and Cons of PieceworkPros and Cons of Piecework• Easily understandable, equitable, Easily understandable, equitable,

and powerful incentivesand powerful incentives

• Employee resistance to changes Employee resistance to changes in standards or work processes in standards or work processes affecting outputaffecting output

• Quality/safety problems caused by Quality/safety problems caused by an overriding output focusan overriding output focus

• Possibility of violating minimum Possibility of violating minimum wage standardswage standards

• Employee dissatisfaction when Employee dissatisfaction when incentives either cannot be earned incentives either cannot be earned or are withdrawnor are withdrawn

Individual Incentive Plans (cont’d)Individual Incentive Plans (cont’d)

• Merit PayMerit Pay Is a permanent cumulative salary increase the Is a permanent cumulative salary increase the

firm awards to an individual employee based on firm awards to an individual employee based on his or her individual performancehis or her individual performance

Can detract from performance if awarded across Can detract from performance if awarded across the boardthe board

Becomes permanent ongoing reward for past Becomes permanent ongoing reward for past performanceperformance

Generally based on performance appraisal of Generally based on performance appraisal of workerworker

11-24

Merit Pay Options

Give annual lump-sum merit raises that do not make the raise part of an employee’s base salary.

Tie merit awards to both individual and organizational performance.

11-25

Merit Incentives

A reward based on how well a job was done

The most widely used plan for managing individual performance

Merit increases usually spread evenly throughout the subsequent year

Traditionally results in a higher base salaryafter an annual performance evaluation

80 to 90% of firms offer merit raises, but little research has examined merit pay or its effects

Percentage of Employees Who Agreed Percentage of Employees Who Agreed thatthat

Better Performers Get Better IncreasesBetter Performers Get Better Increases

Incentives for Professional Incentives for Professional EmployeesEmployees• Professional EmployeesProfessional Employees

Are those whose work involves the application Are those whose work involves the application of learned knowledge to the solution of the of learned knowledge to the solution of the employer’s problems.employer’s problems.

Lawyers, doctors, economists, and engineersLawyers, doctors, economists, and engineers

• Possible IncentivesPossible Incentives Bonuses, stock options and grants, profit sharingBonuses, stock options and grants, profit sharing

Better vacations, more flexible work hoursBetter vacations, more flexible work hours

Improved pension plansImproved pension plans

Equipment for home officesEquipment for home offices

Nonfinancial and Recognition Nonfinancial and Recognition AwardsAwards• Effects of Recognition-Based AwardsEffects of Recognition-Based Awards

Recognition has a positive impact on Recognition has a positive impact on performance, either alone or in conjunction performance, either alone or in conjunction with financial rewards.with financial rewards.

Day-to-day recognition from supervisors, Day-to-day recognition from supervisors, peers, and team members is important.peers, and team members is important.

• Ways to Use RecognitionWays to Use Recognition Social recognitionSocial recognition

Performance-based recognitionPerformance-based recognition

Performance feedbackPerformance feedback

Social Recognition (non financial) by Gujarat Social Recognition (non financial) by Gujarat Gas Company LimitedGas Company Limited

FIGURE 12–1 The Gujarat Gas Company Uses Special Congratulatory Cards to Recognize High-performing Employees

FIGURE 12–1 Social Recognition and Related Positive Reinforcement Managers Can Use

• Challenging work assignments

• Freedom to choose own work activity

• Having fun built into work

• More of preferred task

• Role as boss’s stand-in when he or she is away

• Role in presentations to top management

• Job rotation

• Encouragement of learning and continuous improvement

• Being provided with ample encouragement

• Being allowed to set own goals

• Compliments

• Expression of appreciation in front of others

• Note of thanks

• Employee-of-the-month award

• Special commendation

• Bigger desk

• Bigger office or cubicle

Combining Financial and Nonfinancial AwardsCombining Financial and Nonfinancial Awards

•Employee recognitionEmployee recognition•Gift Certificates Gift Certificates •Special EventsSpecial Events•Cash RewardsCash Rewards•Email/Print CommunicationEmail/Print Communication•Training ProgramsTraining Programs•Work life BenefitsWork life Benefits•Variable payVariable pay•Group travelGroup travel•Individual travelIndividual travel

Non Financial TechniquesNon Financial TechniquesNon Financial TechniquesNon Financial Techniques

Awards & Recognition:Awards & Recognition:

Employee of the Month/Quarter/YearEmployee of the Month/Quarter/Year CertificateCertificate CircularsCirculars Public/Staff RecognitionPublic/Staff Recognition Personalized GiftsPersonalized Gifts

Working Environment:Working Environment:

• Non Political EnvironmentNon Political Environment• Good CultureGood Culture• Transparency in work placeTransparency in work place• Hygiene & SafetyHygiene & Safety• Effective Grievance HandlingEffective Grievance Handling• Clear Code of ConductClear Code of Conduct• Efficient working hoursEfficient working hours• Freedom of working styleFreedom of working style

Family WelfareFamily Welfare

• Child/Elder CareChild/Elder Care• Fitness FacilitiesFitness Facilities• Family InsuranceFamily Insurance• Creche FacilityCreche Facility• Employee Assistance ProgramsEmployee Assistance Programs

Social GatheringsSocial Gatherings

•PartiesParties•PicnicsPicnics•GamesGames•ContestsContests•Festival CelebrationsFestival Celebrations

Paid Leave & VacationsPaid Leave & Vacations

Incentives for SalespeopleIncentives for Salespeople• Salary PlanSalary Plan

Straight salariesStraight salaries Best for: prospecting (finding new clients), Best for: prospecting (finding new clients),

account servicing, training customer’s sales force, account servicing, training customer’s sales force, or participating in national and local trade showsor participating in national and local trade shows

• Commission PlanCommission Plan Pay is a percentage of sales results.Pay is a percentage of sales results.

Keeps sales costs proportionate to sales revenuesKeeps sales costs proportionate to sales revenues May cause a neglect of nonselling dutiesMay cause a neglect of nonselling duties Can create wide variation in salesperson’s incomeCan create wide variation in salesperson’s income Likelihood of sales success may be linked to Likelihood of sales success may be linked to

salesperson’s performancesalesperson’s performance Can increase turnover of salespeopleCan increase turnover of salespeople

Incentives for Salespeople (cont’d)Incentives for Salespeople (cont’d)• Combination PlanCombination Plan

Pay is a combination of salary and Pay is a combination of salary and commissions, usually with a sizable commissions, usually with a sizable salary component.salary component.

Plan gives salespeople a floor Plan gives salespeople a floor (safety net) to their earnings.(safety net) to their earnings.

Salary component covers company-Salary component covers company-specified service activities.specified service activities.

Plans tend to become complicated, Plans tend to become complicated, and misunderstandings can result.and misunderstandings can result.

Specialized Commission PlansSpecialized Commission Plans• Commission-plus-Drawing-Account PlanCommission-plus-Drawing-Account Plan

Commissions are paid but a draw on future Commissions are paid but a draw on future earnings helps the salesperson to get through earnings helps the salesperson to get through low sales periods. low sales periods.

• Commission-plus-Bonus PlanCommission-plus-Bonus Plan Pay is mostly based on commissions.Pay is mostly based on commissions. Small bonuses (“spiffs”) are paid for directed Small bonuses (“spiffs”) are paid for directed

activities like selling add-ons or slow-moving activities like selling add-ons or slow-moving items.items.

Incentives for Managers and Incentives for Managers and ExecutivesExecutives• Executive Total Reward PackageExecutive Total Reward Package

Base salary (cash)Base salary (cash)

Short-term incentives (bonuses)Short-term incentives (bonuses)

Long-term incentives (e.g., stock options)Long-term incentives (e.g., stock options)

Short- and Long-Term IncentivesShort- and Long-Term Incentives• Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus

Plans intended to motivate short-term performance of Plans intended to motivate short-term performance of managers and tied to company profitability.managers and tied to company profitability.

Issues in awarding bonuses Issues in awarding bonuses Eligibility basisEligibility basis Fund size basisFund size basis Individual performance awardIndividual performance award

Long-term incentivesLong-term incentives Stock optionsStock options Performance sharesPerformance shares Indexed optionsIndexed options Premium price optionsPremium price options Stock appreciation rightsStock appreciation rights

PerksPerks Golden parachutesGolden parachutes

Other Types of Long-term Incentive Other Types of Long-term Incentive PlansPlans

The “Sweetness” of Executive Perks



Piecework Team Incentive Plans Profit sharing




Lump sum merit pay

Incentive awards

Sales incentives


Team/Group Incentive PlansTeam/Group Incentive Plans• Team (or Group) Incentive PlansTeam (or Group) Incentive Plans

Incentives are based on team’s performance.Incentives are based on team’s performance.

• How to Design Team IncentivesHow to Design Team Incentives Set individual work standards.Set individual work standards.

Set work standards for each team member Set work standards for each team member and then calculate each member’s output.and then calculate each member’s output.

Members are paid based on one of three formulas:Members are paid based on one of three formulas:

All receive the same pay earned by the highest producer.All receive the same pay earned by the highest producer.

All receive the same pay earned by the lowest producer.All receive the same pay earned by the lowest producer.

All receive the same pay equal to the average pay All receive the same pay equal to the average pay earned by the group.earned by the group.

Pros and Cons of Team IncentivesPros and Cons of Team Incentives• ProsPros

Reinforces team planning and problem solvingReinforces team planning and problem solving Helps ensure collaborationHelps ensure collaboration Encourages a sense of cooperationEncourages a sense of cooperation Encourages rapid training of new membersEncourages rapid training of new members

• ConsCons Pay is not proportionate to an individual’s effortPay is not proportionate to an individual’s effort Rewards “free riders”Rewards “free riders”

Group Incentive PlansGroup Incentive Plans• Gainsharing PlansGainsharing Plans

Programs under which both employees and the Programs under which both employees and the organization share the financial gains according to a organization share the financial gains according to a predetermined formula that reflects improved predetermined formula that reflects improved productivity and profitability.productivity and profitability.

A form of group compensation based on group or A form of group compensation based on group or plant performance (rather than organization wide plant performance (rather than organization wide profits) that does not become part of the employee’s profits) that does not become part of the employee’s base salary.base salary.

Reasons for adopting gainsharingReasons for adopting gainsharing

Implementing a Gainsharing PlanImplementing a Gainsharing Plan

1.1. Establish general plan objectives.Establish general plan objectives.

2.2. Choose specific performance measures.Choose specific performance measures.

3.3. Decide on a funding formula.Decide on a funding formula.

4.4. Decide on a method for dividing and distributing Decide on a method for dividing and distributing the employees’ share of the gains.the employees’ share of the gains.

5.5. Choose the form of payment.Choose the form of payment.

6.6. Decide how often to pay bonuses.Decide how often to pay bonuses.

7.7. Develop the involvement system.Develop the involvement system.

8.8. Implement the plan.Implement the plan.

Scanlon PlanScanlon Plan Rewards come from employee participation in improving productivity and reducing costs.

Rewards come from employee participation in improving productivity and reducing costs.

Rucker PlanRucker Plan Shared rewards come from the difference between labor costs and sales value of production.

Shared rewards come from the difference between labor costs and sales value of production.

ImproshareImproshare Gainsharing based on increases in productivity of the standard hour output of work teams.

Gainsharing based on increases in productivity of the standard hour output of work teams.

Gainsharing Incentive PlansGainsharing Incentive Plans

Earnings-at-riskEarnings-at-riskEncourages employees to achieve higher output and quality standards by placing a portion of their base salary at risk of loss.

Encourages employees to achieve higher output and quality standards by placing a portion of their base salary at risk of loss.

The Scanlon Leadership NetworkThe Scanlon Leadership Network• For more information on the program go toFor more information on the program go to

http://www.scanlon.org/

http://www.scanlon.org/

Gainsharing PlansGainsharing Plans

Philosophy of cooperation

Involvement systemIdentity

Scanlon Plan Components

CompetenceBenefits sharing

formula

Scanlon Plan Suggestion ProcessScanlon Plan Suggestion Process

At-Risk Variable Pay PlansAt-Risk Variable Pay Plans• Put some portion of the Put some portion of the

employee’s weekly pay at risk. employee’s weekly pay at risk.

If employees meet or exceed If employees meet or exceed their goals, they earn incentives. their goals, they earn incentives.

If they fail to meet their goals,If they fail to meet their goals,they forego some of the paythey forego some of the paythey would normally havethey would normally haveearned.earned.



Piecework Team Profit sharing




Lump sum merit pay

Incentive awards

Sales incentives


Enterprise/Organization Wide Incentive PlansEnterprise/Organization Wide Incentive Plans

•Profit SharingProfit Sharing Any procedure by which an employer pays, or Any procedure by which an employer pays, or

makes available to all regular employees, in makes available to all regular employees, in addition to their base pay, current or deferred addition to their base pay, current or deferred sums based upon the profits of the enterprise.sums based upon the profits of the enterprise.

Challenges:Challenges: Agreement over the percentages of shared of profits and Agreement over the percentages of shared of profits and

the forms of distribution (cash or deferred) of profits the forms of distribution (cash or deferred) of profits between company and employeesbetween company and employees

Annual variations and possibility of no payout due to Annual variations and possibility of no payout due to financial condition of companyfinancial condition of company

Maintaining motivational connection of profit-sharing to Maintaining motivational connection of profit-sharing to performance of employeesperformance of employees

Enterprise Incentive Plans (cont’d)Enterprise Incentive Plans (cont’d)

•Stock OptionsStock Options Granting employees the right to purchase a Granting employees the right to purchase a

specific number of shares of the company’s specific number of shares of the company’s stock at a guaranteed price (the option price) stock at a guaranteed price (the option price) during a designated time period.during a designated time period.

The value of an option is subject to stock The value of an option is subject to stock market conditions at the time that option is market conditions at the time that option is exercised.exercised.

Employee Stock Option Plans

What Is a Stock Option?

A stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years. The price at which the option is provided is called the “grant” price and is usually the market price at the time the options are granted. Employees who have been granted stock options hope that the share price will go up and that they will be able to “cash in” by exercising (purchasing) the stock at the lower grant price and then selling the stock at the current market price.

How Stock Option Plans Work

Here is an example of a typical employee stock option plan. An employee is granted the option to purchase 1,000 shares of the company’s stock at the current market price of $5 per share (the “grant” price). The employee can exercise the option at $5 per share—typically the exercise price will be equal to the price when the options are granted. Plans allow employees to exercise their options after a certain number of years or when the company’s stock reaches a certain price. If the price of the stock increases to $20 per share, for example, the employee may exercise his or her options to buy 1,000 shares at $5 per share and then sell the stock at the current market price of $20 per share.

Companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price. Companies revalue the exercise price as a way to retain their employees.

Enterprise Incentive Plans (cont’d)Enterprise Incentive Plans (cont’d)

•Employee Stock Ownership Plans Employee Stock Ownership Plans (ESOPs)(ESOPs) Stock plans in which an organization Stock plans in which an organization

contributes shares of its stock to an contributes shares of its stock to an established trust for the purpose of stock established trust for the purpose of stock purchases by its employees.purchases by its employees. The employer establishes an ESOP trust that qualifies as The employer establishes an ESOP trust that qualifies as

a tax-exempt employee trust under Section 401(a) of the a tax-exempt employee trust under Section 401(a) of the Internal Revenue CodeInternal Revenue Code

Stock bonus plans are funded by direct employer Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock.contributions of its stock or cash to purchase its stock.

Leveraged plans are funded by employer borrowing to Leveraged plans are funded by employer borrowing to purchase its stock for the ESOP.purchase its stock for the ESOP.

Employee Stock Ownership PlansEmployee Stock Ownership Plans

Rewards and Risks of ESOPSRewards and Risks of ESOPS

AdvantagesAdvantages DisadvantagesDisadvantages

Liquidity and valueLiquidity and value

Pride of ownershipPride of ownership

Deferred taxesDeferred taxes

Single funding basisSingle funding basis

Not insuredNot insured

Retirement benefitsRetirement benefits

FRINGE BENEFITSFRINGE BENEFITS

FEATURES OF FRINGE BENEFITSFEATURES OF FRINGE BENEFITS

• An employee enjoys them in addition to the An employee enjoys them in addition to the salary he/she receives.salary he/she receives.

• They are not given for specific jobs They are not given for specific jobs performed but to make jobs more attractive.performed but to make jobs more attractive.

• They are not linked to productivity so do not They are not linked to productivity so do not reward performance in any way, criteria reward performance in any way, criteria used is other than performance.used is other than performance.

• They have an indirect impact on workers’ They have an indirect impact on workers’ efficiency. If impact is direct, it is not a efficiency. If impact is direct, it is not a fringe benefit.fringe benefit.

Types of Fringe BenefitsTypes of Fringe Benefits

•Pay for time not workedPay for time not worked•Employee securityEmployee security•Safety and healthSafety and health•Welfare and recreationWelfare and recreation•Old age and retirementOld age and retirement

THANK YOUTHANK YOU

welcome to the class of hrm. pay for performance & financial incentives prof. hiteshwari jadeja

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