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Analysis of Economic Factors in a Business

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Published: Mon, 09 Oct 2017

Profit Sharing, Revenue Sharing, Piece Rate, Time Clocks and Spot Checks

 

Submitted by Group 6:-

  • Neethi Nair-14020541031
  • Neha Paswan-14020541032
  • Nilesh Tayade-14020541033
  • Nishant Thool-14020541034
  • Nishith Mohanty-14020541035
  • Nitish Vats – 14020541036
  • Akanksha Chaudhary – 14020541065

Profit Sharing:-

Profit sharing are the commission plans to introduced by business firms that provides direct or indirect wages to the employees that is dependent on the company’s profit earned, in addition to the employee’s regular salary and bonuses.

In public companies, these are the profitability assigned to the employee as the equity shares.

Profit sharing plans are generally based upon the predetermined economic sharing regulations that define how much should be split between the company as a principal and the employee as an agent.

The manager can use this to enhance workers’ efforts making the workers’ compensation dependent on the underlying profitability of the firm. Offering workers compensation that is tied to underlying profitability provides an incentive for workers to put forth more effort.

The company can also earn profit from this, by sharing the profit with the employees’ retirement benefit account, which will be non-taxable for the company.

Profit sharing is a type of variable pay, which is dependent on the profit gained by the company.

Wells Fargo & Company is an American multinational banking and financial services holding company which is headquartered in San Francisco, California, with “hub-quarters” throughout the country. It is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization.

Its profit sharing is as follows:-

(https://www.wellsfargo.com/biz/retirement/profit-sharing-plans/)

  • For companies, size really doesn’t matter to offer profit sharing. Employee eligibility is set while joining.
  • Employer: Up to 25% of compensation or $52,000 in 2014. Profit sharing plans allow the company to vary every year according to the profit.
  • The contributions are deducted from the taxable income.
  • The withdrawn contribution and earnings are taxed as ordinary income.
  • Stocks, bonds, mutual funds and Advisory Products available through a Wells Fargo Advisors brokerage account.
  • There will be a 10% IRS early withdrawal penalty if the profit is withdrawn before age 59½ unless valid exception.

Exceptions:

  • Normal retirement age
  • Separation of service after five years and reaching age 55
  • Death
  • Disability
  • Substantial equal periodic payments over life expectancy
  • Qualified military reservist

Required withdrawals must begin at age 70½

Deadline to set up and Fund

  • Must be established by the last day of the business’ fiscal year
  • Contributions may be made up through the business tax filing date (plus extensions)

REVENUE SHARING :

Revenue sharing is a business arrangement that makes it possible for two or more parties to share in the profits and losses realized by a business operation. The exact structure of the revenue sharing strategy varies based on governmental regulations that are applied in the jurisdiction in which the business is located, and the terms and provisions found in the contract that establishes the working relationship between the concerned parties. This approach may be used to compensate employees of the firm above and beyond the usual salary or wages, or be used to provide compensation to affiliate partners in an online business venture. Within a business setting, revenue sharing may take place as part of a limited partnership arrangement. Here, the partners agree to share in the profits and losses sustained by the operation, with specific provisions on how those profits and losses are shared each accounting period. Essentially, the general partner has the responsibility of reporting the level of profit or loss incurred to the limited partners, then compensating them according to the terms found in the partnership agreement.

USER ROLES:

  • Managers will setup available business models and parts of them are the revenue share model
  • Service provider will setup revenue share model associated to Applications and services, and they have to be loaded in the Revenue Settlement & Sharing System
  • Developers have to know about the revenues of their applications and services
  • Involved service/applications providers have to know about the revenues of their applications and services

The following figure shows a conceptual architecture of a system for settling and sharing revenues. There are a number of different sources of revenues for a given service that will be integrated and processed according to the business model of each service and the revenue sharing policies specified for each partner. The final revenues balance will be transferred to a payment broker to deliver the payments to each provider/developer

Infinite Risk/Reward Revenue-Sharing model Case Study:

Raising the Bar in Smart Pricing

Smart Pricing has received a lot of attention in the Information Communication Technology (ICT) industry over the last 12 months. IT service providers are touting it as a key differentiator in a very competitive post-crisis environment, and organizations are demanding for more risk/reward and usage-based pricing so that their ICT partners have more accountability in each engagement and these ICT engagements are more aligned to business priorities. International Data Corporation (IDC) is predicting that Smart Pricing will account for close to 50% of all ICT services transactions by 2015. Infinite, an Indian IT services and software provider, has been one of the most aggressive services providers in this game changing market dynamic whereby approximately 30% of its total revenue is derived from risk/reward pricing models. Its intellectual property–based revenue sharing model is certainly setting the pace in the industry where many ICT service providers are still struggling to come up with the right formula. Infinite is not only setting the pace in Smart Pricing models in the ICT industry, it has clearly raised the bar for the rest of the field.

Organization Overview:

Infinite Computer Solutions is an India-headquartered global services provider of infrastructure management services, intellectual property (IP)-leveraged solutions, and IT services. The company focuses on the telecom, media, technology, manufacturing, power, and healthcare industries. Presently, telecom is its principal vertical and this includes telecom service providers as well as networking equipment vendors. Its services portfolios span application management outsourcing, packaged application services, independent validation and verification, product development and support, and higher value-added offerings including managed platform and product engineering services.

It currently has 3,668 employees and has a global footprint of 16 offices across the globe including Singapore, the U.S., the U.K., India, Malaysia, and China. R&D sites are concentrated in Indian cities like Bangalore, Chennai, Hyderabad and Gurgaon. The company is listed on the NSE and BSE and its FY10 revenue was approximately US$140 million. Infinite has a healthy mix of customers from the list of Fortune 100 companies including IBM, Alcatel Lucent, and Motorola across several verticals, but its strengths continue to be in the telecom and healthcare sectors.

Challenges & Solutions :

Mature products are targets: Currently, Infinite works with organizations, examines their or their clients’ product portfolios, and identifies products or solutions that are mature and have a significant installed base. The products continue to be essential to many buyers, have a proven revenue generating record, and can be better streamlined via an off shoring model to India.

The upside potential must be significant: Infinite will have to execute careful due diligence before actually making any large-scale investment. One of the guiding principles is that the product or solution must be able to deliver 20%–50% growth over the next few years with further investments.

Risk/reward pricing models vary: Infinite has made significant progress in raising the share of its revenue that is derived from risk/reward pricing models. It currently stands at close to 30%, one of the highest if not the highest in the industry. Revenue derived or splits between Infinite and client varies from deal to deal but it is dependent on several factors. For every There are usually three sets of revenue streams to drive growth. Additional new sales of the product, services revenue, and annual maintenance are the three sets of revenue streams to drive growth. The combination of these three must be able to deliver an upside that ranges 25%–50% of growth. The proportion of revenue that is attributed to the customer will generally be lower if the revenue upside potential is less, accounting for new investments that could refresh the product.

How much to invest in the new product? : Infinite would also need to do its due diligence as to what and how much investment it needs to put into these products to generate the type of growth that it is looking for. Aware that some of these products have great fluctuations in revenue, which may be difficult to forecast, the company has to factor this into its planning.

Results:

  • According to IDC this unique engagement model and smart pricing will eventually define the ICT industry over the next few years. Clearly one of the trendsetters, Infinite is setting an excited pace in Smart Pricing that many of its competitors will have to play catch-up.
  • Infinite’s unique smart pricing model has achieved sustainable returns. In today’s economic environment, organizations are looking for flexibility and agility; and as a result of this relationship, many of its existing clients are now able to realign their resources by channeling them into strategic areas of growth.
  • Increase in the value of offerings as R&D investment in core products as well as additional Infinite capital ploughed in will have the overall impact of enhancing the total solution or product portfolio.
  • The company posts 20%–50% revenue growth, usually depending on a number of factors including how speculative the product or solution is. Infinite is clearly on a growth trajectory and thus, its IP-based risk/reward model has found a warm reception among some organizations.

Piece-rate pay:-

Piece-rate pay gives a payment for each item produced and is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. Piece-rate pay is also sometimes referred to as a “payment by results system”, “piece work” or “performance related pay”. The oldest type of performance pay, piece rate is when an employee is paid a fixed rate for each unit of production. In other words, he or she is paid by results.

For example, a factory worker may be paid per item he or she makes on a production line.

In the United Kingdom and in various other countries with minimum wage laws, pay rate must be used in unification with minimum wage laws for employees. For example, an employee who works at a $0.1 per-piece rate and completes 70 pieces in an hour would not receive $7.00 but would receive his state’s minimum wage, which might be, for example, $7.25 an hour. However if he is able to work fast enough to complete 90 pieces in an hour he can earn $9.00 per hour. So, per-piece rate pay can act as an incentive for employees.

Incentive contracts such as piece rates and profit sharing are designed to solve principal–agent problems when effort is not observable. The benefits of the piece rate system is that it motivates employees financially to complete as much work as they can, and consequently they can increase their monetary reward by maximizing their output.

A potential problem with paying workers based on a piece rate is that effort must be expended in quality control; otherwise, workers may attempt to produce quantity at the expense of quality. Therefore, piece-rate pay encourages effort, but, it is reasoned, often at the expense of quality.

From the employee’s perspective, there can be certain problems which might affect the production and eventually affect their pay. The problems which can possibly hamper the production may include breakdown of the production machinery or delay in the delivery of the raw materials which slows down the production. These factors are outside of the employee’s control – but could potentially affect their pay.

The solution to these problems is that piece-rate pay systems tend, to have two elements:

  • A basic pay element which is a fixed time- based element
  • An output-related element- Generally the piece-rate element is only elicited by the business exceeding a target output in a specific defined period of time

Piece-rate systems are broadly classified into three categories:

i. Straight Piece-rate

ii. Piece-rate with Guaranteed time rates

iii. Differential Piece-rates

Straight Piece-rate method payment is made on the basis of affixed amount per units produced without regard to the time taken. Thus the earnings could be calculated as follows:

Earnings= Number of units x rate per unit.

The fixations of piece rate generally depend upon:

  • The comparable time rate for the same class of workers
  • The expected output in given time

In Guaranteed time rates system payment is at time rates but adjusted to the cost of living. The employer balances the high labor cost by increasing the price of the products. The merit awards for skills, personal qualities, ability, punctuality etc. are also considered in this system.

Differential Piece-rate system is a wage plan based on a standard task time wherein the worker receives increased or decreased piece rates as his production varies from that expected for the standard time. This is also known as an accelerating incentive.

Comparison of three price rate systems

Wages during Differential Piece rate

Period Straight Piece rate

Guaranteed Base wage

Straight piece rate with

minimum guaranteed wage

Standard output

Output in pieces produced

Time clocks and spot checks :-

Few methods of encouraging workers to put forth their best efforts are piecework, time clocks, and spot checks.

Time clock is relatively simple and inexpensive technique to introduce into a place of business; however the flaws in it is that the information received from time clock is relatively useless in determining employee’s working habits. A time clock can only inform a manager of how long an employee spends in the workplace, but not how much time the employee is actually spending working i.e. how efficiently is he working. There could be a possibility that the employee is simply socializing most of the day or just doing the irrelevant tasks and the time clock would make no determination between employee with such behavior and the employee who works diligently throughout the workday. So, we can say that Time clocks don’t monitor efforts made by the employee; rather, simply measures his presence at the workplace from beginning to the end of workday. Thus it acts as an inferior method to monitor manager-worker problems.

A more efficient method than Time clock that not just measures the time spent by employee at workplace ,but also measures his/her performance, is spot check. In this case the manager gives time to time visit at workplace to monitor its employees. The objective of these spot checks and inspections is to counter irregularities committed against the Community budget.

The spot checks may concern, in particular

  • Business books and documents such as invoices, pay slips, bank statements, lists of terms and conditions, statements of materials used and work done, and Computer data
  • Packaging, Production and dispatching systems and methods
  • Physical checks as to the nature and quantity of goods or completed operations
  • The collection and checking of samples
  • The progress of works and investments for which financing has been provided, and the how it has been used
  • Accounting and budgetary documents
  • The technical and financial implementation of subsidized projects

The advantages of spot checks are as follows:

  • It reduces the cost of monitoring workers
  • The managers need not to be available at different places at same time
  • It also increases employee efficiency. With workers not knowing if the manager will show up or not, they put more effort at work, as suddenly getting caught “goofing off” may lead to dismissal or a reduction in pay

As everything has its pros and cons, same is the case with Spot checking. Some of disadvantages of spot checks are as follows:

  • Frequent spot checks, however, are costly and reduce the firm’s profitability
  • Spot checks work, in effect, through threat
  • These can have negative impact on employees moral; he/she can’t work freely at workplace due to threat of being watched every moment.

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