Organisation wide incentive plans

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Organisation Wide Incentive Plans

Presented By- Prabhat Kumar Pradeep Yadav

Praveen Kumar Praveen K. Srivastav

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Content

IntroductionProfit sharingGain sharing Employee stock ownership planReferences

IntroductionOrganization 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 sharingGain sharingEmployees stock ownership plans

Profit sharing: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.

The purpose: To strengthen the loyalty of employees to the

firm by offering them an annual bonus. The share of profit of the worker may be given

in cash or in the form of shares in the company. In India, the share of the worker is governed by

the Payment of Bonus act.

Merits:

1)     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.

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Merits(cont….)

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.

Demerits 1)   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 unity of trade unions.

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Gainsharing

•Gainsharing is the sharing with employees of greater-than-expected gains in profits and/or productivity.

Gainsharing attempts to increase “discretionary efforts”—that is, the difference between the maximum amount of effort a person can exert and the minimum amount of effort necessary to keep from being fired.

Cost-savings gains are shared among employees and the company.

It is better for motivation.

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Gainsharing(cont…….)It is a popular family of incentive programs that include a

system to monitor the performance of the organization and distribute rewards when goals are met, and focuses on employee involvement in order to increase their sense of ownership.

The basic principle is that everyone will gain more if each person acts in the interest of the group rather than in the interest of the self. Thus, gainsharing rewards people for working together.

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When does Gainsharing work best?Gainsharing works best when an organization's

performance levels are easily measurable. Measureable metrics include teamwork, output, product quality, safety, and attendance.

When work environment is based on openness and trust.

Requires management commitment, training and frequent and ongoing communications.

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Commonly used gainsharing plans:

Scanlon Plan

Rucker Plan

ImproShare

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Scanlon PlanJoseph Scanlon, 1937

The Scanlon plan has been implemented in many organizations, especially in smaller unionized industrial firms.

The basic concept underlying the Scanlon plan is that efficiency depends on teamwork and plant wide cooperation.

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Scanlon Plan(cont……)The system is activated through departmental

employee committees that receive and review cost-saving ideas submitted by employees.

The scope of the departmental committees are passed to the plant screening committee for review.

Savings that result from suggestions are passed on to all members of the organization.

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Scanlon Plan(cont……)Incentive rewards are paid to employees on the basis

of improvements in pre established ratios.

Incentive =$ Labours cost / $ total sales value

The Scanlon plan is not a true profit-sharing plan, because employees receive incentive compensation for reducing labor costs, regardless of whether the orga nization ultimately makes a profit.

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NumericalAverage monthly sales as a base period = Rs1,00,000Average monthly wage costs as a base period=Rs20,000Incentive = Rs Labours cost/ Rs total sales value=

20,000/1,00,000= 20 Work out the "normal" ratio of wage costs to sales=20%Suppose the first month's sales =Rs2,00,000The wage costs = Rs30,000The normal ratio (20%) would have produced wage costs

=Rs40,000Saving= Rs 40,000-Rs 30000 =Rs10,000 Shared 50-50 between the company and the employees.

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Rucker PlanThe Rucker plan was devel oped in the 1930s by the

economist Allan W. Rucker.

Emphasizes employee involvement

The Scanlon formula measures performance against a standard of labor costs in relation to the dollar value of production, whereas the Rucker formula introduces a third variable: the dollar value of all materials, supplies, and services that the organization uses.

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Rucker Plan(cont….)The Rucker formula is calculated as follows:

= $ Value of the Labor Costs

($ Value of Production) – ($ Value of Materials, Supplies, and Services)

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NumericalAverage monthly sales as a base period = Rs1,00,000Average monthly wage costs as a base period=Rs20,000Value of Materials, Supplies, and Services=Rs20,000Incentive = $ Value of the Labor Costs / ($ Value of Production) –

($ Value of Materials, Supplies, and Services)The ratio of wages to added value=Rs20,000/(Rs 1,00,000 - Rs 20,000)

=20,000/80,000= 25%Suppose the first month's sales =Rs2,00,000The wage costs = Rs30,000Value of Materials, Supplies, and Services=Rs40,000The normal ratio (25%) would have produced wage costs

=Rs40,000Saving= Rs 40,000-Rs 30000 =Rs10,000Shared 50-50 between the company and the

employees.

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IMPROSHAREImproshare plans measure changes in the relationship

between outputs and the time (input) required to produce them.

This plan is minimally affected by changes in sales volume, technology and capital equipment, product mix, or price and wage increases. It's the easiest of the gainsharing plans to understand and install.

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It is an industrial engineering-based gainsharing plan that uses past production records to establish base performance standards.

The ImproShare plan, which was developed in 1973, measures only labour cost and uses time standards and past production records to set a production criterion. The difference between current labour hours to produce a given amount of output and past labour hours on similar output is the basis of the bonus formula.

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Advantages of GainsharingSupports other performance improvement efforts and

helps promote positive change

Helps companies achieve sustained improvement in key performance measures

Rewards only performance improvement

Enhances employee focus and awareness

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Enhances the level of involvement, teamwork and cooperation

Aligns employees to organization goals

Promotes morale, pride, and more positive attitudes toward the organization

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Disadvantages of GainsharingPaid on the basis of group performance rather than individual

merit.

Requires a participative management style.

Requires that management openly shares information related to performance measures.

Increases the level of organizational stress since everyone has more of a financial stake in the organization's success.

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ESOPEmployee stock ownership plan originated in the USA in

early 90’s.Stock option plan implies the right of an eligible

employee to purchase a certain amount of stock in future at agreed price.

The eligible criteria may include length of service, contribution to the department/division where employee works.

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The company may even permit employees to pay the price of 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 to the name of the employee whenever he or she decides to exercise the option.

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Benefits by ESOPStock options are motivator.Employees remain loyal and committed towards

company.ESOP foster a long term bond between the employee

and the company.Reduced employee turnoverLesser supervision

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Demerits of ESOP

Only profitable companies can use the toolFalling share price could mean losses for employeesSometimes employee feel forced to join

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Reference

http://www.citeman.com/13906-organization-wide-incentive-plans.html#ixzz2PtpXubV0.

Human Resource Management By V S P Rao.Human Resource Management By K Aswathappa.

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