Structured Organisations And Employees Commerce Essay

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In an organisation there are many departments doing equal contribution for the successful running of the company, whether it is big or small. These successful organisations are well structured and the employees working in them are skilled, well trained and intelligently recruited or selected. Thus , for any organisation to work properly and effectively, whether in the field of manufacturing, marketing, sales, internal workforce i.e. staff, accounts or board members, it need well qualified employees with full enthusiasm, commitment and faith towards work. The department that select these employees is the' Human Resource department'.

"We believe our employees are our greatest asset. As such, we treat all employees with respect and appreciation for their contributions to the company. We believe not only in providing ongoing training, but also rewarding outstanding effort and results." - Copeland Toyota [1]

"We truly believe that our employees are our greatest asset. By investing in people and making the bank a better place to work, we're building a better business both today and for the future." - HSBC Bank [2]

Thus the theme of this assignment is the, "importance of employees and the challenge for the employers to keep motivating their employees by providing them financial as well as non financial pays and benefits".

As, employees are the greatest asset of an organisation, that is why, along with training and support it provide an excellent working environment, a high benefit package and competitive pay plans to them because they understand that the quality employee is an investment. Therefore, employees are the heart of the company as because of them company is alive. [3]

Work today is more demanding than ever before- employees are continually being asked to do more, often with fewer resources. As firms move away from offering career or even employment security, employees find themselves rethink their contribution and commitment to the firm.




If firms withdraw the old employment contract, which was based on security and promotability, and replace it with faint hopes of trust, employees will return in kind.

Employee contribution becomes a critical business issue because in trying to produce more output with less employee input, companies have no choice but to try to engage not only the body but the mind and soul of every employee. As business partners HR professional play a critical role, in developing this employee-firm relationship. [1]

Here the main purpose is to explain how to use performance-based incentives to motivate employees, managers and executives, salespeople, and professionals and the organisational incentive plans.

Relation between motivation and incentives-

Every big and small business wants motivated employees as they should work more effectively, efficiently and produce best results. Using monetary, incentives, benefits and other rewards improve motivation, but doing it fairly and appropriately is more challenging task. [2] While designing an incentive plan it should be kept in mind by the manager, which different people react to different incentives in different ways.

According to a theory, a high Positive Affective individuals are energetic, active, and alert those respond well to non-incentive plan and Low Positive individuals who are listless, lethargic and apathetic and respond much more favourably to merit raises than did the high PA's.[3]

There are two types of incentive Plans-

Financial Incentives or benefits

Non Financial Incentives or benefits

Financial Incentives and benefits-

Financial incentive means financial rewards paid to workers whose production exceeds some predetermined standard.

Financial incentives was popularised by Frederick Taylor and he spearheaded the scientific management movement, a management approach that emphasised improving work methods through observation and analysis and most important, he popularised the use of incentive plan.[3]

[1] Human Resource Champions by Dave Ulrich" The Next Agenda for Adding Value and Delivering Results", Harvard Business School Press ,1997


[3] Human resource management by gary dessler, pearson international edition, eleventh edition,2008

Merit Pay or Merit raise

It is any salary raise the company awards to an individual employee based on his or her respected performance and it becomes the part of the employee's base salary while bonus is one time payment.

But merit pay is subjected of much debate, some say that performance based rewards can motivate improved performance and other argue that it can lead to 'free-ride situation' (discussed later)

Example 1.- "The $65 incentive"- In 1994 when Continental Airlines was experiencing crisis because of its worst performance and had reached to the net loss of $613 million, the company introduced a group incentive scheme according to which each of its 35,000 employees would get a bonus of $65 in a month as soon as Continental ranked among the top 5 airlines. This program worked despite of free-rider problem (discussed later) and employees exerted more effort, and planes took off on schedule and by 1997, Continental's profit soared to $385 million.

5.a Why merit raises -

Merit raises are commonly used by managerial employees and it is one of the financial incentive systems.

According to studies, almost 90 % of large public and private sector companies consider merit pay programmes for their employees.

When the raises are related to the performance which are required to earn them then merit raise act as a motivator.

5.b Merit raise is based on -

Employee's performance in Quarter or for particular tenure.

Position of the employee in the pay range.

Time since the last pay rise. [7]

(We will examine some of the incentive plans and see their peons and cons simultaneously.)

Money payment by the employer is termed as financial incentives and it can be in direct or indirect mode.

Direct mode - Higher wages and salaries, Profit-sharing plans, Employee stock ownership Plan (ESOP), commission, Scanlon plan, Gain Sharing, Annual Bonus, Merit Plans etc.

Indirect mode- Provision for house, subsidized food, telephone, transport vehicles etc are examples of indirect financial incentives.[1]

Organisational Incentive Plans- Organisationwide incentive or variable pay plans are plans in which all or most employees can participate, and which generally tie the reward to some measure of companywide performance and include direct mode of financial incentive plans.

Profit-Sharing Plans -

Profit sharing refers to the process whereby all or most employees receive a share of the firm's annual profit. Profit-sharing boost productivity and morale, but that their effect on profits is insignificant, once you factor in the costs of the plan's payout.[2]

Example 1- Pillsbury and General Foods were among the first companies to distribute a percentage of their profits to their employees as a bonus and was introduced by Harris Trust and Savings bank of Chicago in 1916.

It is sometimes seen that even when the companies are unable to provide guaranteed wages, during the hard economic times, many companies have turned to profit-sharing plans.[3]

Example 2- Chrysler Corporation an automotive company introduced profit sharing plan for its union and non-union employees in 1988, amid of an economic recession. [4]

On January 18 2005, it reported record profits, and announced profit-sharing of $8000 to each employee, it was a history in the distribution of the profit-sharing, when the average profit sharing in US was $4,300. "We enjoyed a great year because of the hard work and dedication of Chrysler employees," Chrysler's chairman, Robert J.Eaton said. According to him it was an excellent way to acknowledge their efforts and to motivate them. Source- The New York Times dated - Jan 19, 1995


[2] Human resource management by gary dessler, pearson international edition, eleventh edition,2008 Pg 472, 473, 485



Example 3- On 26 may 2009, UK's largest super market store, Tesco recorded £3bn profit and the share bonuses worth of £98m was announced to be distributed to more than 207,000 employees. The share scheme was an incentive to both part-time and full-time working staff for their record-breaking performance.Source- The Guardian dated 26 May 2009(Article)

Employee Stock Ownership Plans (ESOP) -

"ESOP are companywide plans in which a corporation contributes shares of the firm's 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 makes contributions annually in proportion to total employee compensation, with a limit of 15% of compensation."[2] pg 487

If the company gives interests to the plan participants, it seems that company is performing well and believed to encourage employees as they also now act as shareholders.

There are many features which make ESOP unique from other benefit plans-

Only ESOP is a mandatory law, to invest chiefly in the securities of the sponsoring employer.

Its ability to borrow money, makes ESOP a unique qualified benefit plan for employee.

It also helps the shareholders to closely held corporations to diversify their assets, by placing some of their shares of the company's stock into the 'ESOP Trust' , and purchasing other marketable securities for themselves in their place.[3][2]pg 487

Example 4- The Leveraged ESOPs is used as a technique by corporate. A trust has been created by a company which wants to make annual contributions and allocated to individual employees.

A leveraged ESOP borrows money from a bank or from a lender, to buy shares in the sponsoring company or in order to buy a major part or shares from retiring owners in private organisation.[4]

In Nonleveraged ESOP, each year, company contributes stock or cash to the ESOP to buy stock and in turn ESOP holds stock for employees and periodically notifies them that how much they own and what is it worth. And at the time of the retirement or when employee leaves the company, he receive the stock or cash.

Example 5- According to Perry Phillips, president of ESOP Builders, shortage of knowledge workers and soaring need of high tech employees to accept jobs in the US has highlighted the need of ESOP for the federal government.

Scanlon Plan-

It is an incentive plan developed in 1937 by Joseph Scanlon, a United Steel Workers Union official which was designed to cut the worker in on the adventure, the decisions and the profits of rising production and to help the management to drive the motivation of employees in order to improve production.[2]488,,9171,807657,00.html

In Scanlon Plan management is required to get ready to discuss openly and whole heartedly with the workers and unions about the financial and non-financial issues of the company.

The workers are promised a bonus out of savings without throwing the plant wage structure out of balance and motivate the employees to target common goal instead of pitting them against each other.

In this, union and management attack production costs to maintain system production.,9171,807657-1,00.html

Gain Sharing -

It is the new form of Scanlon Plan which engages almost 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.

Example 6 -In past "Gainsharing" has had a chqueered in the health industry. It is broadly defined as an arrangement in which hospitals give physicians a share of the reductions in the cost for patient care that are ascribable, in part, to their efforts. (Using Gainsharing to Align Incentives for Medical Management, achieving High Performance in Health Care, Accenture)


The purpose of gain sharing is to accelerate the performance of a company by promoting awareness, communication, and teamwork, therefore it is based on operational performance. In this unlike profit-sharing employees are paid more frequently than annually according to the operational measures, that is what employee does and how they are compensated.

Fringe Benefit -

Some other benefits include company cars, pension shemes, sickness benefits, mobile bills, subsidized travel and meals, and staff discounts. These are together known as fringe benefits. These are regarded as essential in encouraging the deserved applicants for certain types of job for example company car for sale person.

Example 7 - Government encouraging fringe benefits - taking example of Australian government which encourages fringe benefits as it is applying tax on fringe benefits known as 'Fringe Benefit Tax' which is pai on certain a employer provides to his or her employees and is based on taxable value of various fringe benefits.

Health Care benefit -

This type of merit incentive has strong impact on employee's behaviour and attitude.

Impact on Behaviours - It improves performance and helps in cultural and organisational change.

Impact on Attitudes - it develops the feeling of self importance and senses of ownership of employees and increases the level of awareness.

Example 8 - In JAN, 2005, the computer hardware conglomerate IBM decided to close down its pension plan to the new as well as to old employees and instead offered them the 401(k) benefit plan. Following the same trend the telecom giant Verizon also announced that pension plan is old. "Facing intense competition and the need to reduce its workforce after several mergers, needed a way to persuade thousands of its employees to take early retirement ." [2] pg509The step solved to purpose. First, it added value to the employees' motivation, as they do not have to wait for long for their rewards and second the cost of pension fund was managed.

Article - Business Week " The Rush To Shutdown Pension" dated,9 Jan 2006

Non Financial Incentives - It cannot be argued that money alone can motivate employees though " money is at apex on the list of employees goal". But intrinsic rewards like challenging situation, varied and interesting work and creativity are often looked as true motivators. The financial incentives are short term motivators and generally do not lead to long lasting changes in employees behaviour.

Although, this method indirectly brings monetory rewards, are also targeted at providing psychological benefits for the workers. Source - NGFL Business Studies level Resources, dated 1 Sept 2008.

Non financial incentives can be in the form of performance feedback and social recognition. [2] 497According to Fredrick Herzberg, " the best way to motivate employee is to organise the job so that doing it provides the feedback and challenge that helps satisfy the person's "higher-level" needs for things like accomplishment, recognition and challenging work" [2] 473

Following are the methods of non-financial benefits or incentives -

Job Enrichment - This means giving workers more control over the individual task and allowing them to accomplish meaningful task.

Job Enlargement - employees are encouraged when there is rise in the tasks completed by them.

Empowerment - Giving workers the power to control their own jobs, make decisions and implement their own ideas.

Quality Circles - these include group of workers form same or different departments that do meetings on regular basis discussing problems in service or manufacturing and offer solutions. For example, - groups of designers, buyers, production workers etc.

Training - Without training, workers will not be able to fulfil their potential therefore formal training benefit is essential.

Following factors contributed to the program's success -

The Right Performance Measure taken by board

Mutual Monitoring among employees

Visible Reward, paying bonus separately immediately following the achievement.

Assured Early Momentum in future.[5]

Is incentive enough? Now the question at present era, arises whether the incentives that are provided to the employees are enough to rise their motivation or the employee have some interest or enthusiasm towards the operation of the company.

Example - a high- tech full service systems integration firm based in Silicon Valley " Visionary Design Systens (VDS)" besides giving a substantial portion of their income from bonuses and commission to its employees and each and everyone working in the company and treating them as shareholders , the company also adopted the philosophy of empowerment in which all employees were given significant decision-making authority, and were expected to give their suggestions and feedback for the successful running of the company. This boosts up the moral and motivation of the employees and they work faithfully.

Article- "Visionary Design Systems : Are Incentives Enough?" HBR, by George P.Baker, Karin B. Monsler, OCT 18, 1994

Problems with merit raise -

One can think that almost everyone thinks that he is above average, and failing to get incentive or reward can demoralise them.[6]

Many can think that merit pays given to them are unfair and doesnot meet their performance level, this can lead to frustration among employees.

The Free Rider Problem - The incentive of the big force of employees in the large companies can be proved as a disappointment, as if also, individual not giving their full performance, whatever perks and rewards earned by the population as a whole will be offered to them regardless.

The tendency of supervisors, who pay most of the employees the same pay rise so that they could at least meet their living expenses, or because of the reluctance to alineate some of the employees.

One thing can make merit pay even more worsen for the companies who provide the same to its employees every year, as the expectations of the employees towards the incentive or merit pay increases and they want more in each successive year, this can create financial headache for the management. Source - Leader in London, "Why incentive don't work" by Andrew Zolli

But, this type of merit raise or incentive can be successful if applied with right analysis and measures. That is not to throw out merit raises, but to design them, so that they can be effective. [2] 477


Corporate Social Responsibility (CSR) -

The above discussion will never end and the thoughts regarding the incentives will change along with the change in the thinking of management and employees with time. The only solution for the problems faced during the construction of the incentive plan is to look the matter from both managers as well as employee point of view. But who they are working for and from which they are earning that is The Company. Yes, the benefit of the company should be at the top priority and then others, after all company exist because of them and they exist because of the company.

1.Human Resource Champions by Dave Ulrich" The Next Agenda for Adding Value and Delivering Results", Harvard Business School Press ,1997. Pg 125,126

2. Human resource management by gary dessler, pearson international edition, eleventh edition,2008 Pg 472, 473, 485

3. Steven Etkind, " ESOPs Create Liquidity for Share Holders and Help Diversify Their Assets," Estate Planning21, no. 4 (May 1998). Pg. 158-165.

4. Leveraged ESOPs and Employee Buyouts, Fifth Edition, by Corey Rosen, Luis Granados, Scott S. Rodrick, Kenneth E. Serwinski, Mary Sullivan Josephs, Richard C. May, Robert L. McDonald, David C. Light, Rebecca J. Miller, Deborah Groban Olson, and Laurence A. Goldberg

5. Harvard Business Review 2002(Article), Making Across The Board Incentives Work" by Marc Knez and Duncan Simster.

6. Donald Campbell et al., "Merit Pay, Performance Appraisal, and individual Motivation; An Analysis and Alternative,"Human Resource management37, no.2(summer 1998), pp.131-146.

7. Managing Human Resources. Bohlander and Snell, Thomson/ South Western, 14th Edition, 2007