performance management system incentive plans, profit sharing plans Lincoln incentive plan, Scanlon plan, gainsharing plan, organization wide incentive plans

1. ORGANISATION WIDE
INCENTIVE PLANS
Khushbu Bhardwaj
IMBA/25013/11

2. ORGANISATION WIDE INCENTIVE
PLANS
Organization 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 sense of
 Belongingness
 cooperation &
 Teamwork among all employees.

3. 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

4. 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

5. 1. Cash plan
In cash plan the firm simply distributes a
percentage of profits (usually 15-20%) as profit
shares 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's
supervision.

6. 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.

7. 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).

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13.  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.

14. 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.

15. 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.

16.  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.

17. 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

18.  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.

19. 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%.

20. 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

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