Types of BonusCompensation Management

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Current Profit SharingCompensation Management

Current Profit Sharing• One very basic type of

bonus program is current profit sharing. A company sets aside a predetermined amount, usually between 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary.

Current Profit Sharing• Such bonuses depend on

company profits, either the entire company's profitability or from a given line of business. Sometimes the bonuses are given across the board, and sometimes they are given in larger percentages of compensation the more someone makes.

Current Profit Sharing• Profit sharing refers to various

incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies these plans typically amount to allocation of shares to employees.

Current Profit Sharing

• The profit sharing plans are

based on predetermined

economic sharing rules that

define the split of gains

between the company as a

principal and the employee

as an agent

Current Profit Sharing• For example, suppose the

profits are x, which might be a random variable. Before knowing the profits, the principal and agent might agree on a sharing rule s(x). Here, the agent will receive s(x) and the principal will receive the residual gain x-s(x).

Current Profit Sharing

• The purpose of profit sharing

bonuses is to encourage

employees to understand

how their work affects the

company's performance and

to improve the company's

profitability.

Current Profit Sharing

• Learn how your company

makes money and how your

position can help it make

more. The annual report and

other statements will give

you an idea of how the

company is performing.

Current Profit Sharing

• It will also make you look

good to your manager if

you show an interest in

the company's

performance.

Gain SharingCompensation Management

Gain Sharing• Gain sharing is a system of

management used by a business to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain (improvement).

Gain Sharing

• Gainsharing’s goal is to

improve performance and

eliminate waste (time,

energy, and materials) by

motivating employees to

work smarter as a team

rather than just working

harder.

Gain Sharing• There are two important

parts of a Gain sharing system. One is a bonus calculation. The second is a structured system for employee involvement. Because of these two parts, Gain sharing is best seen as an "organizational development" tool.

Gain Sharing

• This type of bonus program

is most common in

manufacturing plants and is

designed to reward

productivity and improved

product quality.

Gain Sharing

• Gain sharing works best when

employees become responsible

for production quantity and

quality and are encouraged to

improve the way the product is

made. This program reflects a

philosophy that employees

know their job best.

Gain Sharing

• Gain sharing programs pay

out bonuses for statistical

improvements in production

and quality on a quarterly or

sometimes monthly basis,

providing a sense of

excitement for participants.

Gain Sharing

• These programs are often

very successful, transforming

the manufacturing plant into

a center of employee

commitment.

Employee Stock OptionCompensation Management

Employee Stock Option• An employee stock

option (ESO) is commonly viewed as a complex call option on the common stock of a company, granted by the company to an employee as part of the employee's remuneration package

Employee Stock Option

• Many companies use

employee stock options

plans to retain and attract

employees, the objective

being to give employees an

incentive to behave in ways

that will boost the

company's stock price.

Employee Stock Option

• If the company's stock

market price rises above the

call price, the employee

could exercise the option,

pay the exercise price and

would be issued with

ordinary shares in the

company,

Employee Stock Option

• The employee would

experience a direct financial

benefit of the difference

between the market and the

exercise prices.

Employee Stock Option

• If the market price falls

below the stock exercise

price at the time near

expiration, the employee is

not obligated to exercise the

option, in which case the

option will lapse.

Employee Stock Option

• Another substantial reason

that companies issue

employee stock options as

compensation is to preserve

and generate cash flow.

Employee Stock Option

• The cash flow comes when

the company issues new

shares and receives the

exercise price and receives a

tax deduction equal to the

"intrinsic value" of the ESOs

when exercised.

Employee Stock Option• Employee stock options are

mostly offered to management as part of their executive compensation package. They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation

Employee Stock Option• Employee stock options are

mostly offered to management as part of their executive compensation package. They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation