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(2) Extrinsic rewards satisfy an employee's basic need for survival, security and recognition. This includes financial payments, working conditions and managerial behaviour. It can be divided in two parts financial & non-financial. Financial rewards are a hygiene factor; it plays an important part in attracting, and retaining employees.
Increasingly the trend financial rewards are linking reward to performance and work; these include Team performance incentives, ESOP, Profit sharing, Annual Bonus, Marit plan and many more ways are as follows. It will be company's decision, which rewards would suit their employees the best.
ESOP (EMPLYOEE STOCK OPTION PLANS)
It refers that an organization contributes shares of its stock or equity to its employees. In which company gives right to employee to buy share at fixed price for certain time and they are allowed to sell stock after granted time. It allows for issuing to employees of free share maximum of £3000, which are gifts held by trustees for at least 3 years. This is very beneficial to the business because the money is not only the owner's but also the employees and it is also a purchase by employees which funded by bank loan guaranteed of employer, because the loan paid-off from the dividend payment to employees. So, loan interest is tax deductible expense of company. This increases the employee's pride of ownership which in turn increases productivity. According to Bob Nelson (1997), "One of the highest forms of recognition is to treat an employee as if he or she is an owner of the company. This represents a long-term commitment to the individual."
Example (1) Tata technologies India ltd. announced on 18th January, 2001 for ESOP and offered options for up to 10 percent of its subscribed equity for its 1100 employees. Tata Group chairman Ratan Tata said "We have always believed that our people are our greatest assets and are keen that they should participate as co-owners and enhance and consolidate the company's position at high end of engineering automation, enterprise solutions and e-commerce marketplace,"
(http://www.tata.com/company/Media/inside.aspx?artid=iwxXBGs1sSM dated 16.04.10)
Example (2) Bajaj Electrical Ltd., (A part of Bajaj Group India), on 24th July, 2008, informed remuneration and compensation committee of the board in meeting they granted 11000 stock option to eligible employees at price Rs. 443.25 per over a period of 4 years from date of granted stock, as per ESOP scheme 2007. (http://www.topnews.in/bajaj-electricals-issue-shares-rs-443-under-esop-scheme-254943 dated.16.04.10)
Example (3) The members of Lanco Infratech ltd.(India) at theÂ annual general meeting held on 3rd Sep. 2007 granted 500,000 stock options under the employee stock option plan 2006.
(http://www.myiris.com/newsCentre/newsPopup.php?fileR=20070919181929166&dir=2007/09/19&secID=livenews dated 16.04.10)
Example (4) "Publix Super Markets is highly successful privately held company made Fortune's 2005 list of 'Great Companies To Work For.' Its stockholders are the 1,25,000 workers. If you work more than 1000 hours per year at Publix and work more than one year, you get Publix stock. Publix "associates" clearly have a sense of ownership in the company. Says Publix spokesperson, Anne Hendricks "Put yourself in the place of a Publix associate: If you see areas where you can eliminate waste, you are going to do it, because you are going to see it in your next dividend check." (Human resource management by H. John Bernardin - p.339)
Example (5) Infosys ltd. (India) was one of the first companies which adopt ESOP and create additional wealth for its employees. By 1997, 500 employees awarded stock under ESOP. By 2001, Infosys had about Rs. 2000 millionaires on its staff and more than $213 millionaires.
(http://www.icmrindia.org/pdf/Leadership%20Case%20Study%20-%20NARAYANA%20MURTHY.pdf dt. 17.04.10)
ESOP (EMPLOYEE STOCK OWNERSHIP PLANS)
This is a retirement plans, in which the company contributes its stock to the plan for the employees' benefit. In this employee never buy or hold the stock directly. Moreover when employees leave the organization or retire, they can sell their stock back to the organization or sell it to the open market.
Profit sharing is a great way to motivate staff because it benefits both to employee and employer. Employees are getting paid money and can be seen to be working for money. So here pay is related to output, it's also called payment- by-results system. In any kind of pay by results system, the fundamental considerations are how the workers' pay depends on the output achieved and on the extent to which employee efforts in the increased value produced by them. It is designed to give employees a bonus check, if the company performs better the current year compared to the previous year. It can be periodic cash or deposits to an employee account. Profit sharing plan has been criticized as being remote and perceptually unrelated to individual performance, but research indicates that it produces positive results. Many firms also use profit sharing as a tool to control employee turnover. The profit-sharing plan uses profits to fund retirement plans, thus it's also advantageous for tax purposes. It works best as an incentive when the group size is small enough that employees believe they have some impact on group profitability.
Example (6) "Hormel Foods Corporation announced on 27th November,2002 the largest profit sharing distribution to its employees. More than $12.5 million was distributed to eligible hourly and salaried employees companywide on Thanksgiving Eve Day, Under the profit sharing plan eligible employees received on average a sum equal to 2.6 extra base weekly pay checks."
(http://www.encyclopedia.com/doc/1G1-94661106.html dated 15-04-10)
It is a deal with worker involvement and process of sharing financial benefits of reducing costs or increasing productivity. It is opposite to profit sharing plan. Now-a-days gain sharing approach has become popular to motivate higher levels of groups. It is based on measure of productivity not profit. These rewards are given frequently, whereas profit sharing is annual.
"Financial rewards are also an effective motivator, and has the added advantage of being a 'need' that is generally never satisfied. Linking 'people working smarter' with some equitable reward system serves to reinforce the motivational process. 'Gain-sharing' is an effective reward system capitalizing on both aspects." (Dar-El, 1991)
There are four approaches to gain sharing as follows.
Scanlon Plan: It is most common gain sharing plan. It measures relation between sales value of production and labor costs, compute on output by agreed labor cost. It requires a commitment by workers and management to cooperate in the development and maintenance of program.
Rucker Plan: It is almost similar to Scanlon plan; its formula includes the value of all supplies, services and materials and result is a bonus based on the value added on product per labor dollar. So, an incentive is created to save on all inputs. It is linkage of reward to saving more than labor savings and greater flexibility. This concept such as value added and adjustment for inflation which make more difficult to understand.
IMPROSHARE: Stands for "Improved productivity through sharing". It is similar to Scanlon only that in this ration uses standard hours rather than labor costs. In this reward given to employee whenever the actual labor hours used for producing unit in current week or month is less than estimated number would have take to produce the current level of output in period base. It is easy for administer and employees, no difficulty in understanding formula.
Winsharing: It is payout based on group performance is achieved goal of business. It takes demand in market into consideration. It is differs from profit sharing because here performance is measured.
Example (7) "Whirpool in Benton Harbor, Michigan has been operating on winsharing program since 1988 with a productivity gain of 19% since it put in system."(HRM by H John, p350)
Annual bonus is onetime payment at end of year. Most plans of rewards are on base of performance and productivity. But sometimes the staff who are the part of performance indirectly they are not getting rewarded. So, end of the year when company gives bonus to each employee on bases of their wages. It really plays good because employees are getting larger sum of money in one time. Sometimes when company get good profit in a year at that time it declare good bonus at end of the year. Some bonuses are given during festive session as well.
Example (8) "Tata steel ltd. (Tata group) declared on 16th September, 2009 that the employees will get a bonus of 18.5 per cent for the accounting year 2008-2009. The bonus amount will be calculated on the salary (basic + dearness allowance) paid during the last financial year." (http://www.telegraphindia.com/1090917/jsp/jharkhand/story_11504783.jsp dated 16.04.10)
Example (9) "The year 2010 has brought a cheer for the employees of ICICI bank as the bank is expected to give bonuses to majority of its 36,000 employees for the period 2009-10 by April." In year 2008-09, its net profit declined 10% year on year to Rs.3, 759 crore. Therefore bank decided to hold back its annual promotions and bonuses to employees in 2008-09. In second Quarter of the current year 2009-10, the bank's net profit stood at Rs.1040 crore, up to 2.56%, compared with the same last period. Economies prospects improving, the bank's management expects to achieve its financial target and in turn reward its staff.
MERIT PAY PLANS
It is a distribution of pay based on appraisal of worker's performance. The performance standard is set by company in advance. It is usually folded into base pay, and usually granted as percentage of employee's pay. Survey indicates that employees prefer merit pay plans because its link with individual performance with desired outcomes.
MANAGERIAL & EXECUTIVE INCENTIVE PAYS
To retain good manager and executive this types of incentive becomes necessary for the company. It is one type of long-term reward systems, which is directly tied to long term goals. These incentives are paid in form of bonuses not permanently tied with pay. It can be entitled as "Pay for No Performance".
INDIVIDUAL PERFORMANCE ORIENTED PAY (PRP)
It is New Pay system, which is flexible and a more direct linking with individual performance to reward. When an employee perform good and achieve such goals of the business at that time he/she must be rewarded by individual performance pay. It will be any other benefits, pay rate increasing, and some extra bonus. "Through high-quality work, individuals contribute to the broader well-being of of the organization, and are also well rewarded through flexible pay systems."(Scott and Dean, 1992)
TEAM BASED PAY
In which, concentration is given on not only individual performance but on the team or group. "When company cannot measure accurately the contribution of individual workers, team based incentive pay may be appropriate. It includes rewarding to employees on physical output or firm wide profit sharing." (Ischniowski and shaw, 2003)
FOREIGN SERVICES PREMIUMS
It refers that any company doing business globally and to grow themselves they give out premiums and it class as Foreign Service premiums. Foreign services premiums are beyond basic salary to motivate employee to except work. It is ranging between 5 to 40 percent basic pay.
For example, U.K. based insurance company x doing certain products like, life cover, accident cover and income protection throughout the world, and any employees work in Dubai to sale their products, at that time employee suffering problems like different climate, isolation, unhealthy conditions such as diseases etc., at that time company offers extra premium beyond the salary to that employee.
INTERNATIONAL PIECE RATE PAY
It is very common method in factories around the world. The company maintain the hourly rate they pay with the piece-rate system which complies with minimum wage laws of the country.
Example (10) Nike is producing product all over the world, in 2005 they paid as following wages in minimum wages requirement of the respective countries.
20 cent in hour Vietnam, 30 cents an hour in Haiti, 48 cents an hour in Indonesia. (HRM, H John p. 343)
SALES INCENTIVE PLANS
Basically it refers to volume sale of product by employees. The base salary gives guaranteed minimum wages, and commissions are an incentive on sale. Its shows like selfish act because for growth of own employee will sale more and more unit of the company and achieve goals and indirectly company will achieve its goal in market. It determinants of employee control over output and measure of performance for sales. Approximately 75 percent of sales people are on commission based incentive plan.
Example (11) Toyota get fell in sale in February 2010. So, they announced incentive plan in march and they started to increase sale so, they will continue to offer heavy incentives throughout April after the deals helped lift its sales more than 40 percent last month.
SHOP FLOOR INCENTIVE SCHEMES
These schemes relate to the number of items produced or processed by employees and they received the pay. A worker finish his/her work before given period by proper productivity.
Usually it's based on performance of the worker. Company often referred to as payment by result schemes.
Company can motivate employees by offering different types of allowances as follows.
Fuel expenses, Vacation & Holidays allowances, Kids school fees, Insurance fees, Food & accommodation allowances, etc.
"Good performanceâ€¦appropriately rewarded, is likely to lead to job satisfaction" (Huczynski and Buchanan, 2007, pp.253).
To get maximum benefit it is essential for any reward system to consider the individual preferences of the employees. Every employee has different needs and desires, so employees need to be incentivized with something that satisfies them. They should be rewarded soon after they have achieved peak performance and not delayed, so cannot wait for the annual review. This is why a reward system should include small appreciations to recognize effort and success. Management should seek to recognize and celebrate success no matter how small, and reward employees directly responsible for success. Public recognition allows employees to be recognized in front of their colleagues. Boyens notes that employees should be punished in private and be appreciated and rewarded in public. (2007). Once a reward scheme is implemented, employees may expect to receive it each time they achieve, so introducing new ways to reward and recognize them helps keep it fresh and meaningful.