Quiz 12: Establishing a Pay Structure
The stock ownership plans or ESOP is when the employees of the company are offered shares of the company, which can be sold to the company or in the open market. Since the employees hold shares of the company, an improvement in the performance of employees increases the profits of the business that increases share prices-the increase in share price increases employee's income. The ESOP is included in the compensation plan of the CEO of the company. Since the CEO is involved in the decision making of the company, effective decisions increase the share prices, and their income and bad decisions lead to falling in the share prices and their income. The compensation plans of the CEO are linked with performing share prices. The share prices of the company depend on the performance of the company but also on various external factors that are not in the company's control. If the fall in the prices is because of the external factors, the CEO loses their income even if the decisions taken for the company were effective. The CEO who has a large part of compensation tied to the ESOP will lose money in case of falling share prices, but the CEO who has a large part of compensation tied to the base salary may not lose much money in the case of falling share prices. The CEO of the company is responsible for the performance of the overall company. If the company is performing well, but the share prices of the company are falling due to external factors, the CEO may get demotivated to perform well. The incentive plans for the CEO should be made according to their performance, the performance of the company, and to some extent, share prices. If the compensation is entirely dependent on the share prices, the decisions made by the CEO may not be effective.
Merit pay is the performance-linked incentive plan in which employees, as individuals or teams, are paid bonuses according to the performance or target achieved. Paying for suggestions is an incentive paid to employees for providing suggestions that can be effectively implemented in the company for improved results. The method of paying for suggestions is effective in motivating the employees to take the initiative and present their ideas. Still, it is difficult to calculate the return generated from the ideas. Hence, it is difficult to set the amount to be paid for the suggestions. The incentive payment using merit pay links performance with a bonus, and the return of the performance can be easily calculated, and incentives can be paid accordingly. The improvement in the performance of employees as teams or as individuals will improve the performance of the company. It is difficult to calculate the cost return ratio of paying for suggestion incentive plans, which may lead to an increase in cost more than an increase in reward. This affects the progress of the company. With merit pay, the cost and reward ratio are easily known, which will improve the performance of employees, and the company will progress along with its employees. Hence, merit pay is better than paying for suggestions.
There are various internal and external factors and forces that affect the profitability of the business. The internal factors are the factors or forces that are within the business and affect the business. The external forces are the factors outside the business but affect the business. These factors affect the profitability of the business. The external factors or forces that will increase the profitability of the business are the increase in demand for the product, decrease in competition, and an increase in market share of the business. The internal factors that will increase the profitability of the business are an increase in productivity, increased and effective advertising, and reduction in the cost of production. These factors, by reducing cost or increasing sales, increase the profits of the business. The external forces that will decrease business profitability are a decrease in demand, an increase in competition, and a decrease in market share of the business. The internal factors that will decrease in profitability of the business, decrease in productivity, decrease or ineffective advertising, and an increase in the cost of production. These factors, by increasing cost or decreasing sales, reduces the profits of the business.