The goals and objectives of business organizations
All business organizations have some objectives; those are to create not only revenues, profits and growth, but also unique products and services. To attain those objectives organizations need to ensure proper management of human assets that would be a source of sustainable competitive advantage for high performance organizations.
Increase in productivity make happy the potential investors and they also want to retain this productivity without increasing labor time or expenses this is why everybody needs to concentrate on the incentive plans.
There is nothing new about using incentives to motivate workers. Frederick
Taylor popularized the use of financial incentives- financial rewards paid to workers whose production exceeds some predetermined standard. (Garry Dessler, 2006 p.438).
Taylor had become concerned with what he called “systematic soldiering”. He became concerned after constituting some surveys. He found that employees tend to work at the slowest pace possible and to produce at the minimum acceptable level while they are capable enough to perform work on their homes, even after a 12-hour day. (Garry Dessler, 2006).
The goal of all commercial institutions is to maximize shareholder value and it is becoming quite difficult along with the time being due to enormous competition.
To solve these problem financial incentives or pay-for- performance plan is included to the firm’s policy. Moreover, this is evident that this incentive plans work.
(Example 01): one study involved 34 stores of a large retailer. 15 of which installed a new sales incentive plan the researchers found that installing the plan “enables a store to capture more customers from its competitors when there is more intense competition.”
However, there a problem arises that is- according to some survey, it is suggested that most incentive plans are less than effective.
(Example 02)
Mercer Human Resource Consulting found that just 28% of the U.S workers it surveyed said they were personally motivated by their company’s incentive plans. Only 29% said their firms rewarded their performance, “employees do not see a strong connection between pay and performance
In addition, their performance is, and their performance is not particularly influenced by the company’s incentive plan, is how or Mercer pay expert summed up the findings.
What accounts for the fact that about 70% of these employees felt that their firm’s pay-for-performance plans were ineffective? (Garry Dessler, 2006).
Incentive structure
One of the important things needs to be focused on that not everyone reacts to rewards in a same way and not all rewards are suited to all situations.
There are three sets of psychological insights that the manager will find useful in devising his or her incentive plans they are as follows:-
Individual differences
Psychological needs
Employee expectancies
(Garry Dessler, 2006).
Individual Difference:
This means that people differ in personality, abilities, values, and needs, and this difference manifest themselves indifferent desires and in different reactions.
Personality is one of the main factors that individual react in different ways. For example, according to one recent study it was found that people can divided in to two parts based
on affectiveness. They are as follows:
High Positive Affective (High PA)
Low Positive Affective (Low PA)
High Positive Affective (High PA): This type of peoples is energetic, active and alert.
Low Positive Affective (Low PA): This type of peoples is more lethargic, listless, and apathetic.
In the study, it is observed that low PAs responded much more favorably to merit raises that did high PAs
Psychological Needs:
According to Abraham Maslow’s hierarchy theory, we all know that people have five increasingly hierarchy. They are as follows: physiological, Security, social, self-esteem, and self-actualization.
According to this theory one fundamental thing what we have found that is lower level needs first to be satisfied. The bottom rung contains needs best satisfied by things like extrinsically supplied job security and food and shelter. The second, upper rung contains needs or achievement and self-actualization, needs best satisfied by intrinsic rewards like the sense of achievement one derives from doing a challenging job and ling Frederick
(Garry Dessler, 2006).
Herzberg’s Concept:
His theory of motivation simply divides Maslow’s hierarchy into two levels they are as follows:
Higher level: People who are in need of achievement and self-actualization.
Lower level: People who are only in need of psychological, social and safety.
(Garry Dessler, 2006).
Herzberg calls the two factors at the heart of his theory hygiene and motivators. He says the factors (hygiene’s) that satisfy lower-level needs are different from those (motivators) that satisfy or partially satisfy higher-level needs. If hygiene factors (factors outside the job itself, such as working conditions, salary, and incentive pay) are inadequate, employees become dissatisfied. However, adding more of these hygiene’s (like incentives) to the job (supplying what Herzberg calls extrinsic motivation) is an inferior way to motivate someone. Because lower level needs are quickly satisfied.
(Garry Dessler, 2006).
Considering above discussed Factors the following, Incentives Plans to motivate employees are commonly used.
Individual employee incentive plan
Piecework plan:
Straight piecework:
The standard hour plan:
Merit pay as an incentive:
Incentives for Sales Persons
Salary Plan
Commission Plan
Combination Plan
Setting Sales Quotas
Strategic Sales Incentives
Organization wide variable pay plans
Profit Sharing Plans:
Employee Stock Ownership Plan (ESOP):
Scanlon and Other Gain Sharing plan:
Gainsharing Plans:
At-risk Variable Pay plans:
(Gary Desslar, 2007 p.442)
Organization wide variable pay plans
Profit Sharing Plans:
A plan whereby employees share in the company profits. In which all or most employees receive a share of the firm’s annual, profits are popular today. According recent research Ford Motor co. introduced a profit-sharing plan for salaried employees. In addition, General Motors increased its profit-sharing payout when profits improved.
Disadvantages of Profit Sharing:
This profit sharing plan is mainly attractive for the executives not for the hourly paid employees because profit is shared at the end of a fiscal year and the rest of the rest a part is transferred to the employee’s account after retirement.
Company makes profit by selling their finished goods and services but productions of finished goods and services are related to a number of factors. Along with production cost and other internal cost, this is related with raw materials, competitive factors, market conditions, etc. In accordance with the above facts, we can say that employee effort has little to do directly with the company profit.
Employee Stock Ownership Plan (ESOP):
A corporation contributes shares of its own stocks to a trust in which additional contributions are made annually. The trust distributes the stock to employees on retirement or separation from service. Employee Stock ownership plans are companywide plans in which a corporation contributes shares of its own stock-or cash to be used to purchase such stock-to a trust established to purchase shares of the firm’s stock for employees. The firm generally makes these contributions annually in proportion to total employee compensation, with a limit of 15% of compensation. The trust holds the stock in individual employee accounts, and distributes it to employees upon retirement (or other separation from service. (Garry Dessler, 2007)
STRUCTURE OF ESOP:
This plan can be two types they are as follows:
Leveraged ESOP
Unleveraged ESOP
Leveraged ESOP:
The firm makes nothing but periodic contribution of employers stock or purchase stock with cash, which has been contributed by the firm to the employees with an unleveraged ESOP
Unleveraged ESOP:
Initially an ESOP is constructed, of course appropriately administrated by a qualified trustee. After that, the organization company purchases stock from the sponsoring company or the key stockholders of the company. Sponsoring company assures about amortization and makes tax-deductible contribution to the ESOP. Eventually the benefit of shares then contributed to the employees account.
THE ADVANTAGES AND DISADVANTAGES OF ESOP
Employee Stock Ownership Plan is normally used to provide employee the ownership of stock and simultaneously a number of other objectives. As the advantages and disadvantages of ESOP is very clear and transparent so it is important that management also be concern about this. This might be helpful to concern that every business in the U.S is a potential candidate for an ESOP structuring. Employee Stock Option has currently cover over 10 million workers, and the potential clients ranged from small, privately held companies to Fortune 500 firms such as Polaroid and J.C Penny.
(Example 03): The founder of the modern ESOP Lewis Kelso, quoted in the August 1987 about the issue of the institutional Investors by saying this ” this Plan is treated as simply an employee benefit, but is really a device to save the human race”(Rosenberg 1987). While these words are somewhat strong, they represent the sentiments of some of the truly fervent devotees to this movement (Mathews 1989).
(http://www.questia.com/googleScholar.qst;jsessionid=L8GGpQDyMkXhzf5pKVKXGYwBqpRHZh1Q1N2lh918g1hbjnSFrxnV!746944862!1850919211?docId=5000125804)
Advantages:
One of the most commonly accepted advantages is issuing stock options to the employees, receiving what employees become more loyal and committed to the organization.
In order to gain future benefits the talented employees will be attracted to the company.
Business organizations also get tax benefits using this stock option.
Companies do not need to record this compensation as a pending expense because this is technically a form of deferred payment to the employees so these stock options are worthless until they are exercised.
Disadvantages:
Many employees transfer their stock to cash by exercising their option.
There are some employees who left the company with their newly gained wealth as soon as they transfer their stocks into cash and search another growth company to make another quick score.
Some employees’ loyalty to the organizations disappeared after their options have matured.
This plan sometimes encourages institutions to take excessive risk.
Employees who are issued these stocks they are shares the price gain options not the risk of price fall.
There is a chance that a large number of employees will exercise their option to gain more money transfer their stock to cash that will unstable company’s whole equity structure. Due to this reason, company needs to issue new shares what may results to increase the number of shares outstanding and lighten the value of stock because the large number of shares will go the outsiders. To recover this situation company needs to increase their earnings or repurchase their shares from market.
Scanlon and Other Gain Sharing plan:
An incentive plan developed in 1937 by Joseph Scanlon and designed to encourage cooperation. Involvement and sharing of benefits. Few would argue with the fact that the most powerful way of insuring employee commitment is to synchronize the organiztions goals with those of its employees to ensure that the two sets of goals overlap, and that by pursuing his or her goals, the worker pursues the employer’s goals as well. Experts have proposed many techniques of attaining this idyllic state, but few are used as widely of successfully as the Scanlon plan an incentive plan developed in 1937 by Joseph Scanlon, a United Steel Workers Union official. It is still popular today.
Gainsharing Plans:
An incentive plan that engages employees in a common effort to achieve productivity objectives and share the gains. The Scanlon plan is one early version of what we call today a gainsharing plan. Gainsharing is and incentive plan that engages many or all employees’ cost-saving gains shared among employees and the company. In addition to the Scanlon plan, other types of gain sharing plans include the Rucker and Improshare plans.
Benefits of gainsharing:
According to the results of some accountants of different companies they said that due to using Gainsharing methods they have 22 percent decrease in waste, spoilage, and customer returns, a sharp rise in productivity and 17% increase in net profit for the year.
If there are some thing gained after a certain period suppose, if 100 employees produced 1,000 units in 1,000 hours in a given month, and the same 100 employees produced 1,000 units in 900 hours in the next month, that was a gain of 100 hours. So, if labors are paid $10 per hour then the total gain will be $1000, this Gain can be divided among the employees and can be also used to reduce cost.
People can realize their efforts are being rewarded and the production of the company is being increased through the following ways: such as quality of the product is being improved, accidents eliminating, and total income for both the employee and company is being increased. According the success of the companies the federal government also looked into this new method of motivating employees. Bureau of Labor Statistics, reports that some variety of Gainsharings are being used by about 18 percent of manufacturing companies, the number increasing ever year.
Disadvantages of Gainsharing:
There are some companies, which are dragging their shoes on Gainsharing because they are satisfied with their current, medium satisfactory performances.
(http://www.entrepreneur.com/tradejournals/article/183136734.html)
At-risk Variable Pay plans:
Plans that put some portion of the employee’s weekly pay at risk, subject to the firm’s meeting its financial goals. at-risk variable pay plans are essentially plans that put some portion of the employees weekly pay at risk. If employees meet of exceed their goals, they earn encentives. If they fail to meet their goals, they forgo some of the pay they would normally have earned.
Individual employee incentive plan
Piecework plan:
This is the oldest individual incentive plan and is still the most widely used. Here workers are paid a sum (called a piece rate) for each unit he or she produces. Thus, if a Web surfer gets $4o for each e-mail sales lead he finds for the firm, he would make $40 for bringing in100 a day and $80 for200.(Gary Desslar, 2007 p.442)
Straight piecework: Piecework generally implies straight piecework, which entails a strict proportionality between results and rewards regardless of output. However such that the worker allow for sharing productivity gains between employer and worker such that the worker receives extra income for some above-normal production. Therefore, if a worker bringing in30 leads per hour instead of the “standard” 20, his piece rate for leads above 25 might bump to $45 each(Gary Desslar, 2007)
The standard hour plan:
is like the piece rate plan, with one difference. Instead of getting a rate per piece, the worker gets a premium equal to the percent which his or her performance exceeds the standard. So if a workers standard is160 leads per day (and thus $64 per day), and he brings in 200 leads, he would get an extra 25%, or $80 for the day. Some firms find that expressing the incentive in percentages reduces the workers tendency to link their production standard to pay (thus making the standard easier to change). It also eliminates the need to re compute piece rates whenever hourly wage rates are changed.
(Gary Desslar, 2007 p.443)
Merit pay as an incentive:
Merit pay or a merit raise is any salary increase, the firm awards to an individual employee based on his or her individual performance. it is different from a bonus in that it usually becomes part of the employees base salary, where as a bonus is a one-time payment although the term merit pay can apply to the incentive raises given to any employee-exempt or non exempt, office or factory, management or non- management, the term is more often used for white-collar employees and, partculary professional office, and clerical employees. (Gary Desslar, 2007)
Merit Pay option:
Two adaptations of merit pay plans are popular. One awards merit raises in a lump sum once a year and does not make the raises part of the employee’s salary (making them, in effect, short-term bonuses of lower-level workers.) the other ties merit awards to both individual and organizational performance. Traditional merit increases are cumulative, but most lump-sum raises are not. This produces two potential benefits. First, the rise in payroll expenses can be significantly slowed.
(Example 4) Traditionally, someone with a salary of $30000 per year might get a 5% increase this moves the employee to a new base salary of $31,500. If the employee gets another 5% increase next year, then the new merit increase of 5% is tacked on not just to the $30,000 base salary but also to the extra $15, 00 the employee received last year. Lump-sum merit increases can also be more dramatic motivators than traditional merit pay rises.
A 5% Lump-sum merit payment to our $30,000 employee is $1500 cash, as opposed to a traditional weekly merit payout of $29 for 52 weeks. (Gary Desslar, 2007)
Tying lump-sum merit:
This option pays to both individual and organizational performance is another option. Company performance and the employee’s performance (using his or her performance appraisal) receive equal weight in computing the merit pay. Here and outstanding performer would receive 70% of his or her maximum lump-sum award even if the organizations performance were marginal. However, employees with marginal of unacceptable performance would get no lump sum awards even in years in which the firm’s performance was outstanding. The bonus plan at Discovery Communications is an example. Executive assistants can receive bonuses of up to 10% of their salaries. The bolls evaluation of the assistants individual performance accounts for 80% of the potential bonus; 10% is based on how the division does, and 10%on how the company as a whole does. (Gary Desslar, 2007).
Following Chart is a compensation issues and policies
Employee’s Performance
Bottom Third
Middle Third
Top Third
Out Standing
12-15%
9-11%
6-8%
Good
8-11
6-8
4-5
Average
4-7
4-5
2-3
Marginal
1-3
3
1
Satisfactory
No increase
No increase
No increase
Unsatisfactory
(John M. Ivancevich, 2007, p.335)
Advantages:
It makes the reward more valuable by relating it to economic conditions. (Raymond A. Noe, et al, 2004)
It provides a method for rewarding performance in all of the dimensions measured in the organizations performance management system. So appropriately designed system can be linked between employees effectiveness and organizations objectives.
(Raymond A. Noe, et al, 2004)
Drawback of Merit Pay option:
Detractors present good reasons why merit pay can backfire. One is the dubious mature of many firms appraisal processes. Since the appraisals are unfair, so too will be the merit pay you base them on. Similarly, supervisors often tend to minimize difference in employee performance when computing merit raises. They give most employees about the same raise, either because of a reluctance to alienate some employees about the same raise, either because of a reluctance to alienate some employees because of a desire to give everyone a raise that will at least help them stay even with the cost of living. A third problem that almost every employee thinks he or she is an above-average per-former, so getting a below-average merit increase can be demoralizing.
(Garry Dessler, 2007)
During recent years, budgets for merit pay increases were about 3 to 5 percent of pay so average performers could receive a 4 percent raise and top performers perhaps as much as 6 percent, the 2 percent point deference after taxes and other deductions, would amount to only a few dollars a week on their salary so this in spite of their huge performance gap is unacceptable.
(Raymond A. Noe, et al, 2004)
Pay increases may become expected, what if the company has a bad year, or employees fail to produce to expectations? Under these traditional systems, workers still expect wage increases. Theoretically, they should give some of their salary back!
(David A. Decenjo and Stephen P. Robbins, 2005,p.286)
Recommendation and Debate about merit pay option:
Effective Management strongly believes that incentive plan always provide the best motivation and improved attitudes. Both organizations need something beyond production as well as employees needs something beyond money. Employees are found looking for stable alternatives because strait incentives system is no longer successful to meet their expectations.
While other incentives are rigid merit pay option is not. Factors such as stress quality, attendance or any other management wants to improve, merit pay plan can be apply to them. Because it works with the merit elements of employees and it preserve their independence.
(http://www.genelevine.com/Papers/31.htm)
Merit pay is the subject of much debate. Advocates argue that only pay or other rewards tied directly to performance can motivate improved performance. They content that the effect of awarding pay raise across the board (without regard to individual merit) may actually detract from performance, by showing employees the will be rewarded regardless of how they perform. (Garry Dessler, 2007)
Based on performance merit pay, option is designed, but there are huge difference between merit pay option with other incentives plan. Differences are through these ways:
In merit pay option past performance is important than future performance.
Subjective ratings evaluated rather than objective measures.
Here individual performance focused more than organizational performance.
Long-term performances are assessed here and increase in payment becomes permanent in merit pay option.
(http://www.entrepreneur.com/tradejournals/article/85884301.html)
On the other hand, if we focused on the piecework plan, payment is given based on each unit a worker produced. Likewise, if we moved on the strait piecework plan, this is like which entails a strict proportionality between results and rewards regardless of output. In standard hour plan Instead of getting a rate per piece, the worker gets a premium equal to the percent which his or her performance exceeds the standard.
From all individual incentive plan we have found that all plans tie employees beyond a standard but not render them towards the unlimited goal.
If we concentrate on the organization incentive plan:-
In profit-sharing plan whereby employees share in the company profits. There is a great uncertainty about company’s profit because employees do not know whether company would make profit or not and although profit would be given at the end of the fiscal year of the company so it no longer stimulate employee for that long period.
In Employee Stock Option Plan (ESOP), a corporation contributes shares of its own stocks to a trust in which additional contributions are made annually. The trust distributes the stock to employees on retirement or separation from service. This plan haw lots of risk because Many employees transfer their stock to cash by exercising their option.There are some employees who left the company with their newly gained wealth as soon as they transfer their stocks into cash and search another growth company to make another quick score.
Similar situation is found for Scanlon and Gain sharing plan where there are many benefits this is true but these benefits cannot overcome their disadvantages. This thing is true for both individual and organization incentive plans.
Based on the above discussion it can be said that incentive based on merit pay is more effective than those above discussed plan are. But sometimes merit pay option seems to be increase payroll cost at least initially by compensating employees but inspired employees performance will re-compensate the initial extra charges. It provides a method for rewarding performance in all of the dimensions measured in the organizations performance management system. So appropriately designed system can be linked between employees effectiveness and organizations objectives.
Conclusion:
The goal of all commercial institutions is to maximize shareholder value. All institutions give their full effort and do whatever they need to do to achieve organizations objectives. Moreover, it is becoming quite difficult along with the time being due to enormous competition. There is no doubt about this, Managing Human Capital properly organizations can attain their objectives. Where employees are efficient and there is a linked between organizations and employees objective, success will be achieved easily.
To create a link between employees and organizations objective, financial incentives or pay-for- performance plan is included to the firm’s policy. Moreover, this is evident that this incentive plans work. However, incentive plans need to be sincerely selected because all incentive plans does not suit all kinds of employees. There might be such incentive plans what make people committed to the organization welfare. By reinforced with those incentive plans they will be loyal and give their maximum effort to achieve organization goal and objectives. Merit pay incentive is so far recommended to carry out this job. Because only merit is that thing what can bring unlimited success to the organization. And merit is nourished within an independent environment. Only merit pay plan can ensure this. Other incentives plans are more or less effective inspite of their lots of disadvantages but our motto is that organization will be run forever and their success as well so will select the best things for our organization in every aspect.
Reference
Books
John M. Ivancevich (2005), Human Resource Management, McGraw-Hill International Edition.
Garry Desler(2006), Human Resource Management, New Dilhi-110001 Private Limited.
Raymond A. Noe, John R. Hollenbeck, Barry Gerhart And Patrick M. Wright (2007), Human Resource Management,Tara McGraw-Hill publishing limited.
David A. Decenzo and Stephen P. Robbins(2005), Fundamentals of Human Resource Management,WILY publication ltd.
Internet
1. The Advantages and Disadvantages Of ESOP’s: A Long-Range Analysis.
http://www.allbusiness.com/human-resources/158479-1.html
2. Benefits Of Gainsharing: Number Of Companies Using Motivation Technique Is increasing.
http://www.entrepreneur.com/tradejournals/article/183136734.html
3. The Wisdom of Merit Pay
(http://www.genelevine.com/Papers/31.htm)
4. An empirical examination of a merit bonus plan.(Statistical Data Included)
(http://www.entrepreneur.com/tradejournals/article/85884301.html)
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