Motivating employees effectively

I. Introduction

Background of motivation

"How to motivate employees effectively?" has been a controversy problem which management need to be responsible for because motivating employees plays an important role to success of companies. The fact is that people are motivated to do what is in their best interests. Once this happens, employees will naturally feel motivated to work hard, because it is in their best interest to do so.

A manager needs to help build truly "motivating plans," one that inspires employees to do their best each day. People talk about motivation being either intrinsic or extrinsic. What we refer to as extrinsic motivation is really just external factors, like company bonuses, and pay raises (compensation) that ultimately affect our intrinsic motivation. So compensation is supposed to be a crucial factor to motivate employees at workplace. Compensation includes financial incentives and non financial incentives. However, this paper will focus on financial rewards for employees such as profit sharing, gain sharing, ESOP, Scanlon plan and Merit plans because these methods are applied popular to reward employee because they are organization wide incentives which allows every employee in companies joining in. Analysis of these will bring general view on compensation for employees and examine whether managers should apply financial incentives in their companies or not.


1. Compensation: With the development of economic, there are changes in compensation for employees. Financial incentives are popular among companies nowadays, however they become controversy because of its advantages and disadvantages. The manager plays an important role in deciding how effective reward system is to motive employees .

2. Financial compensation:

Type of incentive plans

  • Incentives for operations employees: piecework plans, Team or group incentive plans.
  • Incentive for managers and executives: short term incentives: the annual bonus, long term incentives: share options, employee share puchase plans, employer-funded share schemes
  • Incentives for other professionals: Merit pay as an incentive, incentive for professinal employees, rewarding key contributors, customer service incentive plan
  • Profit sharing
  • Employee share-ownership schemes
  • Scanlon plan
  • Gain sharing plans

a. ESOP:

Employee share ownership plans (ESOPs) are companywide plans in which a firm gives shares of its own stock - or cash to be used to purchase such stock to a trust established for employees to buy shares of the company's stock. The company usually makes contribution annually in proportion to total employee, with a limit of 15% of compensation. The trust keeps the stock in individual employee accounts, and distributes it to employees upon retirement, assuming the employee has worked long enough to earn ownership of the stock.

In this paper, the term of ESOPs includes stock, stock options and phantom stock. Stock equity is a legal transfer of ownership of a share of stock issued by a company. While stock options represent terms under which the company proposes to sell equity to its employees at some point in the future with the price fixed in the present day. e. Stock option plans are widely applied particularly in the technology sphere given they represent a fairly low-cost source of employee compensation for the firm and provide maximum benefit to the employee. As opposed to stock equity, in phantom stock no legal transfer of ownership generally takes place until a liquidity event occurs at which point the phantom stock is fully convertible to real stock equity.

ESOPs bring some advantages to companies:

The greatest benefit that a company gets from this plan is tax. The firm can get a tax deduction equal to the fair market value of the shares that are transferred to the trustee. Moreover, it might also claim an income tax deduction for dividends paid on ESOP-owned stock. Employees are not taxed until they get a distribution from the trust, normally at retirement when their tax rate is lower. The Employee Retirement Income Security Act (ERISA) also let a firm borrow against employee stock held in trust and then repay the loan in pretax rather after-tax dollars.

Secondly, ESOPs can also help the shareholders of closely held corporation to diversify their assets, by placing some of their own shares of the company's stock into the ESOP trust and purchasing other marketable securities for themselves in their place.

Furthermore, ESOPs actually improve sales and financial performance of a company, according to research conducted at Rutgers University. The study also found that ESOPs have a positive effect on an employer's ability to recruit and retain employees.

Example 1: Douglas Kruse and Joseph Blasi, both professors of human resource management at Rutgers examined 343 companies with ESOPs and compared to companies without stock purchase plans. Nearly 70 percent of the ESOP companies continued to conduct business as the same entity, as opposed to only 55 percent of the non-ESOP companies that were still in business at the end of 1999. The research showed that enterprises with ESOPs stayed in business longer than non - ESOPs ones. ESOP companies' improved performance averaged 2.4 percent greater annual sales growth, 2.3 percent greater annual employment growth, and 2.3 percent greater annual growth in sales per employee.

Example 2: Thermacore, Inc. has an ESOPs. Each year, the stockholders and the board of directors approve a dollar value of stock to offer to employee. For instance, the board may decide to make available $100,000 of company stock. No one employee may subscribe for more than $10,000 worth of stock. Thermacore is a private company, so stock trades only within the company. The firm sells to the employees at a discount. The company has the right of first refusal should the employee wish to leave the company or sell stock. Employees can pay for stock in cash or by payroll deduction (textbook). Since applying ESOPs, the performance of employees improved greatly, they were shared ownership responsibility and tried their best for work leading to increase sales and revenues of company.

As a result of sharing ownership responsibility, ESOPs help companies to creat great places to work. That is the reason why the majority of ESOPs companies run smoothly and profitably.

Example 3: Recently, Fortune Magazine showed that roughly 14% of the best companies has been ESOP companies. "Employee owned companies are out there doing exactly as intended, creating great places to work," said J. Michael Keeling, president of The ESOP Association. "In 2008, an economic performance survey conducted among ESOP Association members showed that 92% of companies believed that employee ownership was good for business. With this in mind, our nation's leaders should be looking to these companies and examining business practices and culture to help make our economy stronger."

Example 4: According to a research of the NCEO website, rather than replacing wages or benefits with stock, employees are compensated greatly better in ESOP companies than are employees in comparable non-ESOP companies." One study found that the median hourly wage is 5% to 12% higher, and another found that total compensation is 5.2% higher for companies with more than 5% ESOP ownership in the company.

Example 5: Another example to show the benefit of ESOPs is the Scooter Store. FORTUNE magazine today named The Scooter Store one of the top 100 best places to work in America. This is an extraordinary honor for the nation's leading supplier of power mobility equipment. The Scooter Store has retained its place in the list mentioned above for six years. At that time, The Scooter Store earned recognition for a policy of having department managers assemble their employees daily morning "huddles" to discuss each day's goals and objectives. FORTUNE also noted that employees own 40 percent of the company through an employee stock ownership plan (ESOP), a program still in place today. ESOPs help the firm always do the right thing, be phenomenal, achieve financial success, grow aggressively, and have fun (because of sharing responsibility between managers and employees). When a young company grows fast, its stocks appreciate highly, and workers can build up huge account balances in relative short time. The offer of equity is great way to attract and keep high quality people that a start up couldn't afford. (equity, why employee ownership is good for business - Havard business school press, corey rosen, john case, martin staubulus).

Example 6: Many of the world's best-known companies have used this plan and distributed the wealth and benefits to their employees. Microsoft has created thousand of millionaires over the years by distributing options to buy it rapidly appreciating stock, when the company cut back on options grants in 2003, it distributed stock units instead. Procter& Gamble has been giving and selling stock to its employees since 1887 and is now maybe between 15 and 20% owned by the people who work there. PepsiCo launched an option called Share Power in 1989, giving some five hundred thousand employees an annual equity bonus worth 10% of their pay, recently the company decreased the number of option but increased the number of its shares it distributes. Maybe most-large high-technology companies have handed out options or shares to all or nearby all of the people for them. In addition to Microsoft, Intel, Cisco system, 3Com Corporation, Verisign,, Adobe, ETrade, and hundreds of others also stay in that list. Nevertheless, many non high tech companies, such as Starbucks and Southwest Airlines, do the same thing. Howard Schultz founder of Starbuck, said: "The most important thing I ever did was give our partners (employees) bean stock. That's what sets us apart and gives a higher - quality employee, and employee that cares more." (Equity)

ESOPs are considered to be a kind of performance booster often raising a company's growth rates and profitability, help to improve employee attitudes.

Example 7: The KPS Special Situations Funds target bankrupt basic-manufacturing companies for acquisition, bringing in new capital, new management, and a healthy dose of ESOP. One KPS portfolio company, Blue Ridge Paper Products, Inc., 55% owned by KPS and co-investor GE Capital Corporation, and 45% owned by an ESOP, turned profitable not long after it was bought. At last report, its two thousand worker-owners held a collective stake worth $100 million. It is not too surprising because ESOP is a effective way to motivate employee, improve their performance, as a result it leads to the company's growth and profitability.


However, ESOPs also have its drawback. From the perspective of the employee, the tradeoff is often lower direct cash compensation and the increased financial risk in that their wealth is tied up in the company in exchange for the upside of ownership. ESOPs can cause the huge loss for company if it is not applied right and the term of ownership is misunderstood. As a result, ESOPs in this situation is a threat to performance and motivation of employees.

Example 8: After employees purchased a majority of stake in United Airlines in the summer of 1994, creating the world's biggest employee-owned company, managers started comparing them as "owners" and the airline changed its slogan to "Fly our friendly skies." But everyone knew that something had gone terribly wrong in United Airline. Last summer, United's pilots, who owned the single largest stake in United's parent, the UAL Corp., staged a thinly veiled work slowdown during contract negotiations. This led to cancellation of thousands of flights. By fall, the machinists, the other big group of employee owners, followed suit. The airline took the machinists to court, accusing them of conducting an illegal job action. Their union is threatening to strike. The turmoil inconvenienced tens of thousands of United's customers, placed the airline at the bottom of industry on-time rankings, caused it to rack up huge losses and sent its stock, which is mostly held by the same frustrated employees, tumbling. This problem was explained that while everybody agreed to call workers "owners," they did not act like owners, and management did not treat them like owners. ESOPs somehow are barriers and make interpersonal relationship in company more complicated. Both managers and employees cannot create a true ownership culture throughout company. Instead, labour and management displayed a lack of commitment from the beginning. The workers were roiled by dissension and resentment at the terms of the agreement, while senior managers tolerated. It seemed to be the most ambitious ESOP project but spelled trouble.

United Airlines Employee Ownership Foundering

March 14, 2001|By Laurence Zuckerman, New York Times

Apart from this, if outside competitive forces beyond employees' control reduce profitability and lower the value of employee holdings, there may be an unhappy, less motivated work force. Moreover, ESOPs increase the risk to the employee because sometimes employee retirement plans tend to ignore standard diversification techniques and, as a result, take on an increased level of risk.

Example 9: Enron workers lost more than $1 billion of their retirement savings because they were pressured to invest their 401 (k) savings in company stock. This is a widespread problem at many companies, where workers have as much as 90 percent of their 401 (k) assets in company stock. So employees at firms with ESOPs tend to increase more risk as their portfolios tend to be heavily laden with parent company stock. Moreover, in this case the company used tricky accounting techniques to hide their losses in the foreign subsidiaries. As a result, neither the market nor stock holders had a true picture of what was occurring within the firm. In a single day, the stock price dropped precipitously and, like Studebaker, many thousands lost their life savings.

Example: Zee Entertainment Enterprises Ltd, one of India's largest listed media firms, said its board has approved an employee stock options (esop) programme for the benefit of its employees and directors. Stock options will be issued over a period of five years and would be convertible into equity shares up to maximum of 5% of paid up capital of the company. ZEEL is part of the Subhash Chandra (pictured) -promoted Essel Group. "The employee stock options scheme, subject to shareholders approval, is a mechanism to not only reward the efforts of the employees, as also to develop a greater ownership and to develop a stronger foundation for the future," CEO Puneet Goenka said in a statement. The scheme is subject to the approval of shareholders of the company at the annual general meeting scheduled for 18 August. (Bonus and ESOP)

b. Profit sharing: compare if necessary

Profit sharing plans are plans in which all or most employees receive a share of the firm's annual profits. The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. Generally this is done on an annual basis.


Brings groups of employees to work together toward a common goal (the success/benefit of the company). All of the employees are working together on the same team. The employees have the same goals and are rewarded equivalently to reinforce this shared service to customers and lack of competition with each other.

  • Helps employees focus on profitability.
  • The costs of implementing the plan rise and fall with the company's revenues.

Enhances commitment to organizational goals.First, it is seen as a way to encourage employees to think more like owners (see the agency theory discussion) or at least, be concerned with the success of the organization as a whole. Individual- oriented plans often place little emphasis on these broader goals. Second, it permits labor costs to vary with the organization's ability to pay.

Example: Property agent Savills is planning a payment of around £60 for staff after a recovery in the UK residential housing market. Saill's estate agency arm doubled its profit to £6.3m in 2009 with the London market in particular bouncing back. The company's 20,000 staff will benefit from the £60n bonus pot which will be shared out on a division by division basis.

Example 10: Home Depot instituted a bonus program for all its store workers. Starting in 2003, it started paying store associates a bonus if their stores meet certain financial goals. In one recent year, Home Depot distributed a total of $90 million under that companywide incentive plan. (textbook)

Example 8: As an example, Union Carbide's plan for it's 14,000 U.S. chemical and plastics division employees has frozen base salaries, but, if return on capital exceeds 8%, employees can get lump sum payments of up to 15.4% of base. Larry Doyle, Vice President of Human Resources, points out that Union Carbide secretaries are now "not bashful about nudging managers to stay at a Holiday Inn instead of a more expensive Hyatt" (Fortune, April 9, 1990). Profit-sharing is in use at several well-known companies, including Hewlett- Packard, USX, Ford, GelJeral Motors, ALCOA, Caterpillar, Monsanto, and AT&T (Business Week, November 7, 1988; Personnel, January 1991).

Example 9: General Motors' new division, Saturn, is also using profit-sharing, linking "up to 20 percent of workers' the company's profitability" (New York Times, March 17, 1991).


  • The pay for each employee moves up or down together (no individual differences for merit or performance).
  • Focuses only on the goal of profitability (which may be at the expense of quality). The weakness of profit sharing plans is that individual employees cannot see and know the impact of their own work and actions on the profitability of the company. Consequently, while employees enjoy receiving the profit sharing money, it gradually becomes more of an entitlement than a motivational factor. With profit sharing, employees receive the profit sharing money regardless of their own performance or contribution.

  • For smaller companies, these plans may result in drastic swings in earnings for employees which the employees may find difficult to manage their personal finances.
  • Adherence to the FLSA requires employers to recalculate each worker's "regular rate" of pay. To overcome this limitation, employers may restrict this type of compensation to exempt employees.

Given the above, there is still some doubt about the efficacy of profit sharing for improving organization performance. Based on expectancy theory, in fact, one would expect instrumentality perceptions, and thus individual motivation to be significantly lower under profit sharing than under individual incentives, merit pay, or gain sharing because the link between an individual's performance and organization performance (profits) is necessarily constrained by the fact that many other people have as much or more impact. This is sometimes referred to as the "line of sight" issue.

Example 11: For example, returning to the example of the automobile industry, both Ford and General Motors (GM) have had profit-sharing plans in their contract with the United Auto Workers (UAW) since 1984. The average profit-sharing payment at Ford has been $13,225 per worker versus an average of $1,837 per worker at GM (Bureau of National Affairs, 1990). What accounts for the fact that the average payment at Ford has been over seven times greater? It is probably not because Ford UAW members have worked seven times as hard as their counterparts at GM. Rather, workers are likely to view top management decisions regarding products, engineering, pricing, and marketing as more important. Therefore, although profit-sharing may, in this case, be useful in achieving the objective of making labor costs variable, the motivational impact is open to question.

Example 11: Moreover, even the idea of using profit sharing to make labor costs more variable often seems to go out the window exactly when labor costs begin to vary (downward). For example, the much publicized plan for the Dupont Fibers division (e.g., McNutt, 1990) was eliminated when division profits were down and employees were about to actually experience what downside compensation risk is all (Lbout Santora, 1991). It is likely that management will need to build a persuasive case for why employees should be willing to incur this type of risk.

c. Scanlon plan

Scanlon plan is one of the most powerful to ensure employee commitment to synchronize company's goal with that of their employees. The Scanlon plan is remarkably progressive, considering that it is now about 70 years old. Scanlon plan have 5 basic features:

  • Philosophy of cooperation: managers and workers must rid themselves of the us and them attitudes that normally inhibit employees from developing a sense of ownership in the company.
  • Identity: focus employment involvement, the company must clearly articulate its mission of purpose, and employees must understand how the business operates in terms of customers, prices, and costs
  • Competence: Scanlon plan demands a high level of competence from employees at all level.
  • Involvement system: employees present improvement suggestions to the appropriate departmental level comities, which transmit the valuable ones to the executive level committee. The latter then decides whether to implement the suggestion.
  • Sharing of benefits formula: If a suggestion is implemented and successful, all employees share in 75% of the savings. For example, normal monthly ratio of payroll cost to sales is 50%. Assume the firm implements suggestions that result in payroll costs of 250,000 in a month when sales were $550,000 and payroll cost should have been 275,000. The saving attributable to these suggestions is $25,000. Workers would typically share in 75% of this ($18,000), while $6,250 would go to the firm. In practice, the firm set aside a portion, usually one quarter of the $18,750, for the months in which payroll cost exceed standard.

1. Advantages:

100 percent of all firms with Scanlon Plans report they are having a positive or very positive impact on productivity. Scanlon Plans produce the most consistent pattern of high ratings."

People, Performance, and Pay, American Productivity Center, American Compensation Association

"If you really want to partner with your employees... one such model is the Scanlon Plan, and it is one of the best kept organizational secrets for successful employee involvement through equity and responsibility sharing."

The Scanlon Plan is an innovative management process for total organization development. It includes human motivation and behaviour, general principles for the management of organizations based on those assumptions, and specific procedures for implementing these principles

  • A tool for increasing the motivational forces deriving from the economic needs of organization

Training Magazine, the millennium issue

Example 12: 3 firms, Atwood Vacuum Machine co., Parker Pen co., and Pfaulder co. who have had Scanlon plans operating now for between 14 and 17 years. For the 3 firms, over this quite lengthy period, annual bonuses have ranged on average from 4.5% to 19% with very good correlation between bonuses and profits. This particular scheme provides opportunities for workers to participate in decision making and, on occasions, to self - actualise. So it improves climate of industrial relations, higher morale, better team thinking, and greater acceptance of change. And great impact on worker performance.

2. Disadvantages:

Unsuccessful Scanlon plan revealed that as bonus payout dropped, so did the number of suggestion submitted. For some reason, bonuses dropped then, in some cases, suggestion drop as well, bringing on a downward spiral. (Wage payment system - A.J Geare)

d. Annual Bonus.

Annual bonus is the short term incentives. There are three basic issues to consider when award short-term incentives:

  • Most base eligibility on combination of factors, including job title/level, base salary, and discretionary considerations. Some simple base eligibility on job level or job title. A few base eligibility on salary level alone. Most firms have annual bonus plans aimed at motivating the short-term performance of their managers and executives. Unlike salaries which rarely decline with reduced performance, short term incentive bonuses can easily result in plus or minus adjustments of 25% or more in total pay. The size of the bonus is usually greater for top level executives. Average bonuses range from a low of 10% to a high of 80% or more: a typical company might establish a plan whereby executives could earn 45% of base salary, managers 25% and supervisory personnel 12%. Top level executive bonuses are generally tied to overall corporate results.
  • Fund size: The employer must also decide the total amount of bonus money to make available. They use a straight percentage (usually of the company's net income). (Textbook)
  • Individual awards: Management includes decision of the actual individual awards. The actual award reflects the person's performance because normally a target bonus is set for each eligible position. Companies usually tie top level executive bonuses mostly to overall corporate results, therefore, many firms end up tying short-term bonuses to both organizational and individual performance.

1. Advantages:

Encourage both managers and employee try their best to achieve company's target and improve their individual; performance.

Example: Royal Bank of Scotland Stephen Hester will top up his £1.2 salary with up to £4.8 a year un shares, the bank's annual report revealed yesterday. The new long-term deal with the man who slashed the bank's annual losses from a record £24bn in 2008 to just £3.6bn last year in worth four times his base-pay. The bonus will be paid in three increments. Half will be linked to profits the bank achieves in 2012. A further quarter will be linked to total shareholder return compares to other leading UK banks, with the top rate kicking in If RBS finishes in the top quartile. The final quarter will reflect the bank's share price. He will hit the full amount if he achieves the ambitious goal of boosting the bank's share price from 43p to 75p. Hester waived his £1.6m bonus last month, saying it would deflect attention from the outstanding progress the bank has made since he took the helm. (City A.M, 19 March 2010, RBS may be paid £5m a year bonus).


One of the drawback of this approach is giving the marginal performers to much even the company performance is fair or poor. In this case annual bonus can backfire on a business and become a minefield of employee resentment and hostility toward management. Free- floating bonuses that aren't attached to positive performance can create serious problems for struggling businesses.

What happens, for example, when business takes a nose-dive and management can no longer afford to such huge annual bonuses? Employees who received those goodies in the past, continue to expect them. And the bigger these bonuses are, the more potentially dangerous they become. I've seen corporations face outright mutiny because they attempted to discontinue their practice of offering hefty end-of-the-year bonuses.

Example 13: Between 2002 and 2005, Raymond's annual bonusmore thandoubled from $2.1 million to $4.9 million.[4] According to Exxon Mobil, long-term returns on capital, growth in earnings per share and operating results are key considerations in determining the CEO's salary and bonus.[5]. But does the CEO deserve credit for high gas prices that led to Exxon Mobil's record profits? Not according to Jeb Armstrong, an analystatArgus Research Corp., who said, "There's a perception that they're making too much. The simple truth of the matter is that prices are set by supply and demand, and they are a price taker, not a price maker."[6]. Paying pension benefits on a CEO's bonus acts as a compensation multiplier by dramatically increasing the value of a CEO's future pension. This is because CEOs typically receive much higher bonuses than other employees, and one year's record bonus can translate into a lifetime of higher pension payments.

Cash for Trash: AIG Executives Get Rewards After Bringing Down Insurer

American International Group (AIG) has been kept afloat by more than $170 billion in federal assistance since September 2008.[1] That works out to about $1,500 for every household in the nation.[2]But the New York-based giant insurer that nearly brought down the global financial system paid out more than $500 million in salaries and bonuses to hundreds of senior employees, even as it was being bailed out by the government.

The uproar over AIG pay reached a new level amid revelations in mid-March that it rewarded employees with $450 million in bonuses for 2008when its stock fell from $57.14 a share to $1.57 a share.[3] Worse, $165 million of the payments were in the form of"retention" bonuses to employees of its financial products division, which sold the complex derivatives at the heart of the company's financial troubles.[4]Even more ironic, 52 of the employees quit after receiving their "retention" bonuses.[5]

"AIG now stands for arrogance, incompetence and greed," said Rep. Paul Hodes, a Democratic lawmaker from New Hampshire, in a hearing over the company's bonuses.[6] [5] "Paying Workers More to Fix Their Own Mess," The New York Times, March 18, 2009.

[6] "CEO Testifies AIG Will Ask for the Bonuses to Be Returned," USA Today, March 19, 2009

[1] "Geithner Vows to Recoup AIG Bonuses as Lawmakers Express Fury," Bloomberg News, March 18, 2009.

[2] "Income, Poverty & Health Insurance Coverage in the United States: 2007," U.S. Census Bureau, August 2008

Total Lump-Sum Present Value of Pension: $53,251,003

Workers Lose Jobs, CEO Keeps His After Running Bank Into the Ground

The bank lost nearly $2.4 billion in the fourth quarter of 2008 due to deeper than expected trading and loan losses. It also cut its dividend down to a penny per quarter.[4]Even after receiving billions of dollars in taxpayer money, the bank plans to eliminate up to 35,000 jobs over the next three years.[5]

Meanwhile, CEO Kenneth Lewis collected nearly $10 million in 2008, more than 400 times the average amount a bank teller is paid each year.[6]Since becoming CEO in April 2001, Lewis received $134 million in pay, bonuses, stock awards and pension accruals.[7]

But much of Lewis' compensation has been in cash. His guaranteed base salary has been $1.5 million since 2002 when it was raised from $1.33 million, ensuring him each year more than what most people make in a lifetime.[19]Bank of America's board approved this knowing that non-performance pay in excess of $1 million is not tax deductible.[20]The Corporate Library, a Portland, Maine-based corporate governance research firm, notes that Lewis' base salary is at the 90th percentile for Standard & Poor's 500 firms, and has expressed "high concern" for Bank of America's overall executive compensation practices.[21]

Then there are Lewis' bonuses. In recent years these have been at least three times as much as Lewis' salary and as high as $6.5 million in 2006.[22]With Bank of America's 2008 net income down 73 percent from 2007's net income and its market capitalization down 62 percent to $70 billion at the end of 2008 from $183 billion at the end of 2007, Bank of America's directors decided in early 2009 that Lewis and other senior executives would receive no bonus.[23]

[1] "Bank of America Gets New Round of U.S. Aid," The Washington Post, Jan. 19, 2009.

[2]"Income, Poverty & Health Insurance Coverage in the United States: 2007," U.S. Census Bureau, August 2008.

[3]"Obama Bank Policy Signals $1 Trillion in Writedowns," Bloomberg News, April 3, 2009.

[4] "BofA Sees a 17-year First: Quarterly Loss; Charlotte-based Ban Also Cuts Dividend to a Penny as Government Vows $20 Billion Loan," Charlotte Observer, Jan. 19, 2009.

[5] "Bank of America to Cut Up to 35,000 Jobs," The New York Times, Dec. 11, 2008.

There is widespread public anger about the banking sector's bonus culture, which some observers blame for encouraging excessive risk-taking and helping to tip the world economy into recession.

e. Gain sharing

Gain sharing differs from profit-sharing in at least three ways (Hammer, 1988; Schuster, 1990). First, under gain sharing, rewards are based on a productivity measure rather than profits. The goal is to link pay to performance outcomes that employees can control, thus enhancing the line of sight or instrumentality perceptions (as do the following two differences). Second, gain sharing plans usually distribute any bonus payments with greater frequency (e.g., monthly or quarterly versus annually). Third, gain sharing plans distribute payments during the current period rather than deferring them as profit-sharing plans often do.

1. Advantages:

Improving Plant Performance Through Gainsharing

Woodruff Imberman

Gain sharing offers industry the opportunity to improve plant performance and boost productivity while reducing costs attributed to poor quality (e.g., waste, spoilage, rejects, and customer returns).

Example 15: Today, there are approximately 2,500 companies are using gain sharing, according to a study done by the American Management Association. Among the companies using the plan in their plant operations are such firms as Dresser Rand, Consolidated Diesel, Carter-Day, Dover Rotary Lift, Gradall Company, Ingersoll-Rand, Mixer Systems, Proen Products, Rexnord, Webster Electric, Cincinnati Milacron, and a host of smaller companies.

Gain sharing is not an individual, piecework system. It is a group incentive, pay-for-performance wage systema group bonus in which the entire factory workforce shares as a result of improving productivity above a certain level and decreasing rejects and rework

Example 18: At Whirlpool Corporation's Benton Harbor, Michigan plant, where metal rods are turned into parts for washers and dryers, productivity and quality improvement came as a result of a gain sharing program that reduced costs, bolstered profits, benefited customers, and raised blue-collar take-home pay by an average of about $3,000 a year. Since the onset of the gain sharing plan in 1988, the plant has shown productivity gains of about 19 percent annually, with each year building on the previous year. And quality? The number of parts rejected has sunk to 4 per million from 837 per million. Other firms that have learned how to successfully manage their gain sharing programs are Speed Queen, Merck & Co., Solar Turbines, Corning, Sony Electronics, Carrier, Dresser-Rand, Consolidated Diesel, Georgia-Pacific Paper, Federal Mogul, Colgate-Palmolive, Allstate, CIGNA Corp., Travelers Insurance, several financial institutions, and a number of other producers of durable and nondurable goods.

Example 16: In a study reported by Chicago Business in April 1994, 110 plant managers in Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota were questioned about their gain sharing programs. Forty managers reported productivity gains of 18-25 percent annually; 11 reported gains of less than ten percent; 17 reported poor results and discontinued the plan.

Example 17: The Super Sack Manufacturing Corporation in Fannin County, Texas, which has improved productivity by 88.5 percent over five years, according to manufacturing vice president David Kellenberger.

Example 18: General Tire's 1,950-employee plant in Mount Vernon, Illinois, where the plan has generated $30 million in savings over a five-year period$20 million of which was paid out to workers in the form of bonuses, while the company profited by $10 million, said Floyd Brookman, coordinator of the program.

Example 19: Timken's Faircrest Steel Plant, where gainsharing targeted plantwide improvements and replaced old incentive systems that paid only for individual piece-work operations, said Tim Chapin, senior human resources executive.

Another study done for the American Management Association found that companies with successful plans had ancillary benefits, as well. Besides improving productivity and quality, on-time deliveries rose to almost 100 percent. In addition, employee grievances dropped by 84 percent and absenteeism decreased by 61 percent.

Example 21: New Zealand Can Ltd. New Zealand Can Ltd was a part of the AMCOR group. This plant, in south Auckland, New Zealand, employed around 70 people, and made aluminum cans for drinks like coca-cola and beer. Gainsharing was introduced just before Christmas 1995, and on Christmas Eve, 1996, the plant made a record number of cans in a day. The gainsharing process produced considerable benefits in terms of employee concern for the success of the business and greater understanding of the priorities for achieving success. It also rewarded the company's employees fairly for their efforts.

Example 22: Chelsea Sugar Company Ltd. Gainsharing was introduced early in 1996 as part of a program of change which included introducing self-managed teams. An objective for Gainsharing was to support the restructuring and reward employees for their cooperation and commitment. The Chelsea Sugar Gainsharing System produced significant improvements in several key indicators for success

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Gainsharing. (Summer 1995) Retrieved April 12, 2004 from

Imberman, Woodruff. (1995) Improving Plant Performance Through Gainsharing [Electronic Version.] Journal of The Minerals, Metals & Materials Society 47 (7) (1995), p. 57

Example: Educational technology company Promethean celebrated its successful stockmarket flotation by handing most of its 870 employees a "golden thankyou". Recognising their contribution to the growth of the business, the interactive whiteboard maker gave staff with more than six months' service bonuses of up to £30,000 with an average payout of £3,500. Those who had worked for the company for more than 12 months were given an extra £1,000 for each year's services. More than 400 executive at Promethean's head office in Lancashire and around the world were given share options, handing around 15 percent of the company to its management.

How Promethean's payout package breaks down

800 staff received cash windfalls    More than: 400 members of the worldwide management teams were given share options
£3,500 the average payout            £30,000 the largest bonus

City AM, 20 march 2010, Promethean rewards staff for floation

2. Disadvantages

Despite the success of gainsharing, some firms are still hesitant to adopt the program. One of the factors causing this is described by Peter Drucker in Managing for the Future. He says, "Inertia has undermined more companies than incompetence, poor executives, or failure to manage finances well."

Despite the voluminous and overwhelmingly positive literature on gainsharing, many of these programs have failed. But these failures are usually mentioned only in passing in the many publications on the subject. And no one seems really interested in ascertaining the extent or causes of unsuccessful gainsharing programs. Has gainsharing indeed often been a flop? If so, why?

No Garden of Eden

Example 23: A study done at the behest of the American Management Association and published in 1989 reported that gainsharing is not always a free ticket to an industrial Garden of Eden. Covering three years of experience with gainsharing in 83 companies, the AMA study reported that only one-third of the companies had success with gainsharing, boosting their productivity handsomely and radically reducing the cost of waste, spoilage, rejects, and rework. Two-thirds of the 83 company gainsharing plans were flops; they plateaued in a year or so, and were discontinued. Three major causes of these failures were found. The first was the faulty payout formula by which the gains were to be measured and bonuses paid. Reasonable care was not taken to define the short-term performance objectives to be measured, and to ascertain that they were relevant to the company's long-term goals. Decisions on gainsharing plan objectives cannot be made by an auditor or plant manager with a spare hour or two to do the calculations. When the payout formula devised by management was too "tight"--that is, no matter how hard the work force tried, the payout was minuscule--failure was a sure thing. When the formula was based on the expectation that the work force would achieve zero defects overnight, or that a 100 percent boost in productivity would instantly emerge in the first months of the plan, failure ensued. Guidance in formula determination is almost mandatory.

f. Merit plans

Merit pay is any salary increase that is awarded to employees based on their individual performance. It is different from a bonus in that represents a continuing increment, whereas the bonus represents a one-time payment. Although the term merit pay can apply to the incentive raises given to any employees-exempt or non - exempt, office or factory, management or non management. Traditional merit pay plans have two basic characteristic: merit increases are usually granted to employees at a designated time of the year in the form of a higher base salary; the merit raise is usually based exclusively on individual performance, although the overall level of company profits may affect the total sum available for merit raises. One awards merit raises in one lump sum once a year. The other ties award to both individual and organisational performance.

Merit Pay: An incentive plan implemented on an institutional wide basis to give all employees an equal opportunity for consideration, regardless of funding source. The merit increase program is implemented when funds are designated for that purpose by the institution's administration, dependent upon the availability of funds and other constraints. .


  • Allows the employer to differentiate pay given to high performers.
  • Allows a differentiation between individual and company performance.
  • Allows the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated (such as implementation of new systems).


  • The pay is subjective.
  • Do not encourage teamwork, reduce productivity of companies.

Example: The widespread use of merit pay plans by organizations is a continuing source of debate, with some arguing for and others against the effectiveness of merit pay plans. A survey of senior compensation professionals in 72 organizations was conducted to examine the effectiveness of merit pay in achieving organizational objectives. The results indicate that merit pay is seen as being "marginally successful" in influencing employee attitudes (e.g., pay satisfaction) and behaviors (e.g., performance) which represents a decrease in effectiveness compared to a survey conducted 10 years ago where merit pay was seen as "moderately successful." Merit pay practices shown to be related to improved merit pay plan effectiveness include clarifying the link between pay and performance for the employee by increasing the frequency of appraisals, establishing developmental action plans, and developing a formal merit pay policy with safeguards to ensure employee perceptions of fairness. It is concluded that unless improvements are made to existing merit pay plans they are likely to cease to exist due to a failure to add value to organizational effectiveness. It is recommended that merit pay play a more limited role in organizations and be used to support alternative reward strategies such as gainsharing, team-based pay, and profit sharing.

Human resource executives wrestle with the decision to continue to use merit pay plans or to abandon them. Surveys show that while the number of organizations that continue to use merit pay is declining, merit pay plans are still the most frequently used method of determining pay increases for exempt employees (Heneman, 1992). Merit pay plans continue to be controversial with some arguing for and others arguing against the effectiveness of merit pay plans in achieving organizational objectives. Unfortunately, there is not much research evidence to help human resource executives decide whether to use merit pay. The available evidence is case study in orientation and very organization specific. Unless one faces similar circumstances as those in a particular case, the data from the case are of limited value in making a strategic decision regarding the use of merit pay.

Extensive survey data that is more applicable to a wide range of organizations is available regarding forms of reward strategies other than merit pay (e.g., McAdams & Hawk, 1994). Only one such survey, however, is available regarding merit pay (Peck, 1984). The purpose of the present study was to generate additional data that may be useful to human resource decision makers in deciding whether merit pay adds enough value to the achievement of organizational objectives to be continued to be used and to identify practices that can be used to increase the effectiveness of merit pay plans.

The Peck (1984) survey found that across about 370 organizations in many different industries merit pay was on average judged to be "moderately successful." One objective of the present study was to update these data, as they are now about 10 years old, and see to what extent merit pay was continued to be seen by organizations as being "moderately successful." A second objective of the present study was to determine what criteria are used by organizations to define the "successfulness" of merit pay plans. Peck (1984) did not specify on what basis this determination was made. A third objective was to update current merit pay practices to provide some benchmark data for human resource executives to compare the merit pay plans in their organizations against. Rather than simply repeating the characteristics reviewed by Peck (1984), new practices were added based on new theoretical developments and practices in merit pay since 1984. The final

3. Should we use financial incentives? Cases studies, solution: combination of non financial motivation

After examining disadvantages and advantages of financial incentives such as ESOPs, Profit Sharing, Gain Sharing and Merit Plans we can see that using them or not is still open to debate. From the perception of a majority of managers, those methods are the best ways to motivate their employees and improve employee's performance which help to increase profit and productivity in the companies. Yet, from the perception of researcher they are not likely to be best way to motivate workers. Having said that pay is not a motivator because employers ought to provide adequate financial rewards and then build other, more effective motivators into jobs. More challenging jobs and employee regulations usually make more sense than do financial incentives plans. Moreover, rewards may have unintended results. With incentive plans, people tend to put their efforts where they think they are being measured. For example, in the case of gain sharing reward only productivity and you may end up with poor quality. On the other hand, financial rewards maybe undermine the feeling that the person is doing a good job voluntary and make them always expect for compensation, try to do their work to get financial incentives . This can be destroy the enthusiastic contribution from employees.

Whichever plan managers opts for their companies should have basic features such as: to attract right people for the right job at the right time, retain the best people by recognising and rewarding their contribution and to motivate employees to contribute to the best of their capability. So, management should consider many factors to reward employee effectively. Financial plans are always put on the top list of rewarding people, but sometime it is demotivation .

1. Cash bonus for work on a particular project - 90%

2. Gift cards - 89%

3. A couple of days of extra annual leave - 89%

4. Technology gift (e.g. iPod Nano, digital camera) - 80%

5. Lunch with family or friends paid for by employer - 68%

6. Being 'fast-tracked' for promotion - 67%

7. Lunch or drinks with colleagues paid for by employer - 62%

8. Access to internal training courses - 62%

9. Tickets to leisure or sporting activities for use with family/friends - 61%

10. Option to gain experience in a different department within the organization - 58%

11. Option to gain experience in a similar department in a different organization - 52%

12. A couple of extra days off to do charity/volunteer work - 49%

13. A promotion without pay rise - 37%

Source: PricewaterhouseCoopers poll of 950 British workers, 2010

"Managements have always looked at man as an animal to be manipulated with a carrot and stick. They found that when a man is lured/hurt, he will to get the prize/avoid the pain-and they say: 'We're motivating the employees. 'Hell you are not motivating them, you are moving them." - Frederick Herzberg, Professor Emeritus. Monetary incentives usually encourage compliance and achievement of difficult target instead of encouraging creativity, innovation and foresight which are more important in the long term. Thus employees are not able to express their true talent, and in the long run lose their creativity. Employers also may use monetary incentives as an extrinsic rather than an intrinsic motivator. In oher words, associates are driven to do thing just for the monetary reward versus doing something because the right thing to do. This can terminate good relationships between employees because they are transformed from co-workers to competitors, which can quickly disrupt the workplace environment. Another problem with monetary incentive is that it is given to circumevent a bigger problem for a short run. Sales employees are given bigger monetary incentives to compensate for poor management and poor products, employees are paid more for working in poor management. Monetary incentives can even drive the employees to falsely reporting their achievement. Huge monetary incentive given to the middle managers are seen as a hook to retain them which may make them work counterproductively. Due to all of the problems of financial incentives, management need to vary their reward system: non- financial incentive. Most of non- financial incentives are intrinsic in nature. Employees are working because they feel satisfied or fulfilled by the activity they undertake. Under these circumstance the management can be regarded as more of a support than control. So managers should concentrate more on non-monetary incentives after the minimum level of monetary benefits and properly structure them according to their employee's preference. Non-financial incentive includes flextime, feedback, professional development, work environment, attentive employers... Non-monetary brings memory value - the value of an honorary which is longer-lasting than cash since cash is spent and gone, trophy value: nonmonetary awards can often be shown to co -workers and friends as a trophy given in a appreciation of a good work, flexibility, with non-financial incentive, employers spend less money than cash awards. However, non-monetary incentives hold the same level of performance improvement. For example, Petroleum marketers have used informal rewards to recognize their employees's good work. Chevron (San Francisco, CA) Keeps a large box, secured with a padlock, filled with gifts. An employee being recognized on the spot for some accomplishment is brought to the "Treasure Chst" by his or her supervisor, who holds the key. The employees get to choose an item from the box,which could be anything from a gift certificate, to a coupon for lunch or dinner, to movie tickets. Microsoft maily uses the following three non-monetary rewards: recognition and praises, flexible workinh hours and occasional Friday afternoon offs.To strengthen the motivation of the staff, the majority of respondents suggest that a mix of fianancial incentives be most effectve.

However, when we look at many voluntary organizations such as Oxfam and Salvation Army relying upon thousands of hours of unpaid labour. These example indicated the importance of intrinsic rewards derived from the work. The volunteer receive intrinsic rewards derived from the significance attributed the work: they are not serving customers, they are feeding destitute. Similarly, high qualified professionals may choose to work for organization such as Medicins Sans Frontieres or Annesty International, at a much lower salary than they could earn in a private hospital or law practice, because of the meaning attached to work.

Some factors determine the managers' decision in rewarding their employees

Internal determinants

  • Employer's Compensation Strategy
    • Setting organization compensation policy to lead, lag, or match competitors' pay.
  • Worth of a Job

    • Establishing the internal wage relationship among jobs and skill levels.
  • Employee's Relative Worth - Rewarding individual employee performance
  • Employer's Ability-to-Pay - Having the resources and profits to pay employees.

External Determinants

  • Cost of Living
    • Local housing and environmental conditions can cause wide variations in the cost of living for employees.
    • Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.External Determinants
  • Collective Bargaining

The term extends to all negotiations that take place between an employer, group of employers or one or more employers' organizations on the one hand, and one or more workers' organizations on the other to

(a)Determine the working conditions and terms of employment and / or

(b) Regulate relations between employer and employee/workers and / or

(c)regulate relations between employer organization or employee/workers organization

The best way to reward employee is combination between financial incentives and non - financial incentives because this combination benefits employees in both sides: monetary and morale. Such compensation create the best environment for employees, satisfies them, Consequently the employees contribute the their best to companies.

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