Rwt1 Evaluation Paper
Business Research Report
Three Alternative Compensation Methods Evaluated
Assessment Code: RWT1
Caleb Snyder
000243256
December 15, 2014
Mentor: Brent Smith
Table of Contents
Executive Summary……………………………………………………………………………………………………………………3
Introduction……………………………………………………………………………………………………………………………….4
Research Findings………………………………………………………………………………………………………………………4 Bonus Plans……………………………………………………………………………………………………………………4 Stock Options…………………………………………………………………………………………………………………5 Onsite Child Care……………………………………………………………………………………………………………6
Recommendations…………………………………………………………………………………………………………………….7
Conclusion…………………………………………………………………………………………………………………………………8 References……………………………………………………………………………………………………………………..9 …show more content…
Executive Summary The purpose of this report was to evaluate three alternative compensation/ fringe benefits for implementation in our organization. The three options that were evaluated were bonus plans, stock options and onsite child care services. All three of these options have the potential to be beneficial to our organization. Bonus plans are widely used in one form or another. They are usually tied to production or profit. They can be tailored to fit the needs, size and structure of the company. They have been shown in some cases to increase productivity. Stock options are typically used as form of compensation for higher level management and officers. They are somewhat controversial as there are studies showing positives and negatives of using them. Through my research I have come to the conclusion that because of the conflicting studies of the effectiveness and the possible consequences of using options, that actual stock issuance would be a better alternative that would accomplish the benefits without the risk of negative impacts. Onsite child care is not very widely used. But there are studies showing that it has some positive benefits to the companies that use them. They have been shown to have positive effects on employee retention as well their absenteeism. There may also be tax credits available for those companies that run child care centers. Our company is not quite as large as the typical company that offers this service. For that reason it may not be cost effective or the cost benefit of implementing this may not worth it. Further company specific research should be done in order to find out if people would use the service if offered.
Introduction
In today’s changing world employees have a lot more options for employment than in decades past.
Technology makes it possible for people to work from home at times from across the country. The internet has made looking for jobs and finding jobs much easier. The changing marketplace has caused a change in the employer/employee relationship. In this new job marketplace employers are always trying to find new and better ways to keep their best employees. I was tasked with researching and evaluating three alternative forms of compensation. I chose to research and have recommendations for bonus plans, stock options and onsite child care. I felt that between these three things all of the work force would be covered by one or another. Bonus plans can cover anyone from upper management to lower workers on the production side of the business. There are many studies on them and they have mixed reviews. Bonus Plans offer a wide variety of options that can be somewhat tailored to the company that they are implemented in. Stock options are typically handed out to only the highest level managers and CEOs. However, there have been some companies that have tried offering them to lower level managers as well with mixed results. Stock options have a lot of positive and negative attributes that may make them a somewhat risky solution for alternative
compensation. Onsite Child care is the least researched of the strategies that I have looked into. There has not been a lot of formal study done on the topic, but the studies that have been done do seem to yield some positive results. Bonus plans offer flexibility and good incentives when done right. Bonus plans have been around for a long time and for that reason there have been a lot of studies on them and their effects on employees and organizations. There are many companies of all sizes that use one form of bonus plan or another, and the trend is upwards. Some studies have shown that companies with bonus plans outperform similar companies in their sector without bonus plans. (Smyth, 2009) Bonus plans are an attractive form of compensation for many companies for several different reasons. First, they offer companies a way to manage their payroll more in line with their productivity or revenue. Second, some studies show and many people believe they offer employees an incentive and therefore increase a firm’s productivity. Finally, a company can tailor a bonus plan to their specific company and even to specific divisions within a company. If the companies goal with the bonus plan is to incentivize its employees there are some caveats that must be brought to your attention. First, according to Lowery, et al in 2002 three things must be met for a bonus to be effective motivation. The first is that employees must value what is being offered. Second, the employees must believe they can obtain the bonus. Finally, they must believe that if they reach their goals that they will be given the bonus. Another caveat comes from Gabris, et al in 1985. Their study showed that bonuses must include a team aspect to them. Individual goals only were shown to actually have a negative impact on production due to competitiveness between employees. Their study also showed that employees actually preferred team bonuses over individual ones. The final caveat I will bring to your attention comes from Smyth in 2009. His research showed that for long term employee retention and increased productivity, a bonus of 20% of an employee’s salary was required.
Analysis
Bonus plans are widely used and offer a lot of flexibility. There have been countless adaptations over the years. Some have worked better than others. There seem to be some key aspects of the bonus plan that can really help determine its effectiveness. Some of the aspect are: the amount of bonus money giver proportional to the receiver’s salary, the frequency of the bonuses, the methods or requirements to achieve the bonuses, and the recipient’s value placed on the bonus being offered. If a bonus plan were to be implemented it would be very wise to analyze these aspects of the proposed plan before implementing.
Stock Options work well for high level managers, but studies show mixed results. Stock options are a form of compensation that are usually given to high level managers and executives. According to Wyld in 2011 “Top managers view options as a part of their overall compensation” and that it motivates them to align their interests with the company’s. Stock options are typically given as options to buy stock at a predetermined price if goals are met. They typically have a term limit or expiration date. This means that an executive that receives the options may have a term typically 1-3 years to execute the options. Some companies have offered stock options to lower level employees as well but they have less of an impact. According to Wyld there are a couple problems with offering them to lower level employees. The first is that if more employees are offered them the pool of options becomes diluted and the options don’t amount to enough for those lower level employees to act as enough of an incentive. The second is that in their study they found that companies that offered options to lower level employees did not outperform companies that that did not offer options. However, companies that offered options to only high level managers and executives outperformed both other categories. According to Hannes and Tabbach in 2013, Issuance of stock options can lead to excessive risk taking. The idea behind this is that because the executive has the option to buy stocks at a specified price, he may be willing to take risks with the company in order to raise the stock prices. If the prices rise the executive can execute his options and make a substantial profit. However, if the risk doesn’t pay off to the company the executive will opt not execute his options and wit until the stock price comes back up. This greatly reduces the personal risk to the executive, therefor he can be riskier with the company’s money. Hannes and Tabbach also say that stock options can lead to stock manipulation. In this case the executive may try inflate stock prices in order to execute his options and then sell his stocks at a profit. The stocks then would eventually settle back into their proper price range. Hannes and Tabbach say that studies have shown that inflation of 20% is possible. Some studies show that risk taking is not affected by stock options. “Due to perceived current wealth situation risk taking is not affected by stock options.” (Martin et al, 2013). Basically, they found that the executives with options typically view their options as a part of their current assets. For example, if an executive has an option of 100 shares at $40 per share, he will view that as $4,000. His risk taking is not affected by this because if the company’s shares go up $20 he will then view his option as a $6,000 asset. Whereas, if the company’s stock goes down $20 he will then view his option as a $2,000. Their study showed that the only variance of risk taking was the individual’s personal risk tolerance.
Analysis
Stock options are widely used, however they are primarily used in very large companies or very young companies such as start-ups. Stock options can be used in smaller, younger companies as a portion of salaries to free up cash flow. There are various studies showing options affecting risk taking or not. Some show that t may put companies in dangerous positions while others show the opposite. I tend to side with those that show favorable results. Stock options have been in use for a long time and the fact that they are still used today empirically shows that they have positive results. In other words, if they didn’t work or weren’t beneficial companies would find other ways to incentivize their top employees.
On-site child care is not widely used but does have some recognized benefits for an organization. On-site or company provided child care is fairly self-explanatory. Some companies offer childcare for free or subsidized childcare, usually on-site or nearby the location of the office. In a study by Frazee in 1996 it was shown that “20% of the 313 companies surveyed either currently provide childcare center assistance, or plan to within the next three years.” These companies were all larger sized companies. It seems that with the larger companies it is more economically feasible to provide childcare services than with a smaller company. On-site childcare is shown to offer several benefits. According to Schandl in 92 on-site child care reduced absenteeism in the companies studied compared to companies that don’t offer services. Furthermore, companies that offered childcare options for sick kids reduced absenteeism even further. It seems that adults with children often miss work while their children are sick. Schandl goes on to say that studies have shown that on-site child care can also reduce turnover or increase retention. It seems that parents will stay with a company longer if child care services are provided. The final benefit I discovered is that a company providing this benefit can be eligible for tax credits. According to Rosenberg in 2001 the government offers up to $150,000 tax credit for up to 25% of the cost of opening and operating a child care center.
Analysis
On-site childcare services could be a useful tool for a larger company. There are several shown benefits that could help a company to retain employees and increase productivity. If employees are absent less they will be more productive. Furthermore, the company will save costs of training new employees if the employees they have stay longer. Employees that stay in their jobs longer inherently become better at their jobs and this will also help increase their productivity, as well. A company that offers these services also can get the tax credit which could help the company save a substantial amount of money during tax season. Because it’s a tax credit and not a write off even a company that shows very little profit would benefit substantially from this.
I recommend implementing a bonus system that is tailored to our company’s needs. Due to the nature of bonus plans we can tailor one to fit our company’s structure and its goals. We should also use different goals and bonus structures for the different divisions in our company. For example, setting up a bonus system for the delivery guys based on delivery efficiency while doing a bonus system for the production based on producing a certain amount of product. Most studies show that if a company implements the bonus structure in the proper way it will increase the company’s productivity. Finally, because our company only has about 100 employees, using a bonus system would allow the company to pay our employees more when the company is doing better and less when the company is doing worse. This would free up cash for operations.
I recommend that stocks be used as part of the compensation package for high level management and/or company officers. I am not recommending that we use stock options but instead an issuance of a predetermined amount of actual stock. There are too many conflicting studies on the effects of stock options on risk taking to be sure if risk taking is increased or decreased through the use of stock options. However, if we issue stock when goals are met the people receiving the stock will be more in line with the company’s best interest. Because the stock will be issued regardless of what the price of the stock is; this will cause the people receiving stocks to evaluate the best way to raise the value of the stock. This will tie the risk of the recipients with the company’s.
I recommend that a company specific budget and evaluation be done for an on-site child care center. Our company is not as big as most of the companies that provide this service. However, these can be very beneficial to the company. We need to evaluate how many people would use the service and if our smaller company could afford to provide the service. If it would be financially viable and enough people would use it. I would recommend a plan to implement the system. The implementation would provide financial benefits through tax credits and increase employee retention.
In conclusion, there are three potential alternative compensation methods that we should consider implementing. Bonus plans are very flexible and can be tailored to fit the specific needs of the company. They have been shown to increase productivity when implemented correctly. They can also free up cash for other things as they can be tied to the company’s profit. Stock options or a stock issuance can be a good part of the compensation package for upper level management. If we use stock issuance for part of the compensation it will closely tie the financial interests of the upper level management with those of the company’s. Onsite child care services are not as widely used as the other two forms of compensation/benefits but they do show some really good benefits for a company that uses them. The key to implementing this program would be having enough employees using the system to justify the cost of the program. The benefits of implementing this program would be increased employee retention and financial benefits through tax credits.
References
Smyth, R.C. (1959). Bonus Plans for Executives. Harvard Business Review, 37(4), 66-74
Lowery, C.M., Beadles II, N., Petty, M.M., Amsler, G.M., & Thompson, J.W. (2002). An Empirical Examination of a Merit Bonus Plan. Journal of Managerial Issues, 14(1), 100.
Gabris, G.T., Mitchell, K., & McLemore, R. (1985). Rewarding Individual and Team Productivity: The Biloxi Merit Bonus Plan. Public Personnel Management, 14(3), 231
Wyld D.C. (2011). Do Employees View Stock Options the Same Way Their Bosses Do?. Academy of Management Perspectives, 25(4), 91-92.
Martin, G., Gomez-Mejia, L., Wiseman, R. (2013). Executive Stock Options as Mixed Gambles: Revisiting the Behavioral Agency Model. Academy of Management Journal, 56(2), 451-472.
Hannes, S., & Tabbach, A. (2013). Executive Stock Options: The Effects of Manipulation on Risk Taking. Journal of Corporation Law, 38(3), 533-566
Schandl, K.M. (1992). The Significance of Employer-Supported Child Care. Benefits Quarterly, 8(3), 81-85
Frazee, V. (1996). Onsite Child-care Program Ranks First. Personnel Journal, 75(6), 21.
Rosenberg, L.F. (2001). Child Care May Get Boost From Tax Credit. Business Insurance, 35(31), 3-34
Three Alternative Compensation Methods Evaluated
Assessment Code: RWT1
Caleb Snyder
000243256
December 15, 2014
Mentor: Brent Smith
Table of Contents
Executive Summary……………………………………………………………………………………………………………………3
Introduction……………………………………………………………………………………………………………………………….4
Research Findings………………………………………………………………………………………………………………………4 Bonus Plans……………………………………………………………………………………………………………………4 Stock Options…………………………………………………………………………………………………………………5 Onsite Child Care……………………………………………………………………………………………………………6
Recommendations…………………………………………………………………………………………………………………….7
Conclusion…………………………………………………………………………………………………………………………………8 References……………………………………………………………………………………………………………………..9 …show more content…
Executive Summary The purpose of this report was to evaluate three alternative compensation/ fringe benefits for implementation in our organization. The three options that were evaluated were bonus plans, stock options and onsite child care services. All three of these options have the potential to be beneficial to our organization. Bonus plans are widely used in one form or another. They are usually tied to production or profit. They can be tailored to fit the needs, size and structure of the company. They have been shown in some cases to increase productivity. Stock options are typically used as form of compensation for higher level management and officers. They are somewhat controversial as there are studies showing positives and negatives of using them. Through my research I have come to the conclusion that because of the conflicting studies of the effectiveness and the possible consequences of using options, that actual stock issuance would be a better alternative that would accomplish the benefits without the risk of negative impacts. Onsite child care is not very widely used. But there are studies showing that it has some positive benefits to the companies that use them. They have been shown to have positive effects on employee retention as well their absenteeism. There may also be tax credits available for those companies that run child care centers. Our company is not quite as large as the typical company that offers this service. For that reason it may not be cost effective or the cost benefit of implementing this may not worth it. Further company specific research should be done in order to find out if people would use the service if offered.
Introduction
In today’s changing world employees have a lot more options for employment than in decades past.
Technology makes it possible for people to work from home at times from across the country. The internet has made looking for jobs and finding jobs much easier. The changing marketplace has caused a change in the employer/employee relationship. In this new job marketplace employers are always trying to find new and better ways to keep their best employees. I was tasked with researching and evaluating three alternative forms of compensation. I chose to research and have recommendations for bonus plans, stock options and onsite child care. I felt that between these three things all of the work force would be covered by one or another. Bonus plans can cover anyone from upper management to lower workers on the production side of the business. There are many studies on them and they have mixed reviews. Bonus Plans offer a wide variety of options that can be somewhat tailored to the company that they are implemented in. Stock options are typically handed out to only the highest level managers and CEOs. However, there have been some companies that have tried offering them to lower level managers as well with mixed results. Stock options have a lot of positive and negative attributes that may make them a somewhat risky solution for alternative
compensation. Onsite Child care is the least researched of the strategies that I have looked into. There has not been a lot of formal study done on the topic, but the studies that have been done do seem to yield some positive results. Bonus plans offer flexibility and good incentives when done right. Bonus plans have been around for a long time and for that reason there have been a lot of studies on them and their effects on employees and organizations. There are many companies of all sizes that use one form of bonus plan or another, and the trend is upwards. Some studies have shown that companies with bonus plans outperform similar companies in their sector without bonus plans. (Smyth, 2009) Bonus plans are an attractive form of compensation for many companies for several different reasons. First, they offer companies a way to manage their payroll more in line with their productivity or revenue. Second, some studies show and many people believe they offer employees an incentive and therefore increase a firm’s productivity. Finally, a company can tailor a bonus plan to their specific company and even to specific divisions within a company. If the companies goal with the bonus plan is to incentivize its employees there are some caveats that must be brought to your attention. First, according to Lowery, et al in 2002 three things must be met for a bonus to be effective motivation. The first is that employees must value what is being offered. Second, the employees must believe they can obtain the bonus. Finally, they must believe that if they reach their goals that they will be given the bonus. Another caveat comes from Gabris, et al in 1985. Their study showed that bonuses must include a team aspect to them. Individual goals only were shown to actually have a negative impact on production due to competitiveness between employees. Their study also showed that employees actually preferred team bonuses over individual ones. The final caveat I will bring to your attention comes from Smyth in 2009. His research showed that for long term employee retention and increased productivity, a bonus of 20% of an employee’s salary was required.
Analysis
Bonus plans are widely used and offer a lot of flexibility. There have been countless adaptations over the years. Some have worked better than others. There seem to be some key aspects of the bonus plan that can really help determine its effectiveness. Some of the aspect are: the amount of bonus money giver proportional to the receiver’s salary, the frequency of the bonuses, the methods or requirements to achieve the bonuses, and the recipient’s value placed on the bonus being offered. If a bonus plan were to be implemented it would be very wise to analyze these aspects of the proposed plan before implementing.
Stock Options work well for high level managers, but studies show mixed results. Stock options are a form of compensation that are usually given to high level managers and executives. According to Wyld in 2011 “Top managers view options as a part of their overall compensation” and that it motivates them to align their interests with the company’s. Stock options are typically given as options to buy stock at a predetermined price if goals are met. They typically have a term limit or expiration date. This means that an executive that receives the options may have a term typically 1-3 years to execute the options. Some companies have offered stock options to lower level employees as well but they have less of an impact. According to Wyld there are a couple problems with offering them to lower level employees. The first is that if more employees are offered them the pool of options becomes diluted and the options don’t amount to enough for those lower level employees to act as enough of an incentive. The second is that in their study they found that companies that offered options to lower level employees did not outperform companies that that did not offer options. However, companies that offered options to only high level managers and executives outperformed both other categories. According to Hannes and Tabbach in 2013, Issuance of stock options can lead to excessive risk taking. The idea behind this is that because the executive has the option to buy stocks at a specified price, he may be willing to take risks with the company in order to raise the stock prices. If the prices rise the executive can execute his options and make a substantial profit. However, if the risk doesn’t pay off to the company the executive will opt not execute his options and wit until the stock price comes back up. This greatly reduces the personal risk to the executive, therefor he can be riskier with the company’s money. Hannes and Tabbach also say that stock options can lead to stock manipulation. In this case the executive may try inflate stock prices in order to execute his options and then sell his stocks at a profit. The stocks then would eventually settle back into their proper price range. Hannes and Tabbach say that studies have shown that inflation of 20% is possible. Some studies show that risk taking is not affected by stock options. “Due to perceived current wealth situation risk taking is not affected by stock options.” (Martin et al, 2013). Basically, they found that the executives with options typically view their options as a part of their current assets. For example, if an executive has an option of 100 shares at $40 per share, he will view that as $4,000. His risk taking is not affected by this because if the company’s shares go up $20 he will then view his option as a $6,000 asset. Whereas, if the company’s stock goes down $20 he will then view his option as a $2,000. Their study showed that the only variance of risk taking was the individual’s personal risk tolerance.
Analysis
Stock options are widely used, however they are primarily used in very large companies or very young companies such as start-ups. Stock options can be used in smaller, younger companies as a portion of salaries to free up cash flow. There are various studies showing options affecting risk taking or not. Some show that t may put companies in dangerous positions while others show the opposite. I tend to side with those that show favorable results. Stock options have been in use for a long time and the fact that they are still used today empirically shows that they have positive results. In other words, if they didn’t work or weren’t beneficial companies would find other ways to incentivize their top employees.
On-site child care is not widely used but does have some recognized benefits for an organization. On-site or company provided child care is fairly self-explanatory. Some companies offer childcare for free or subsidized childcare, usually on-site or nearby the location of the office. In a study by Frazee in 1996 it was shown that “20% of the 313 companies surveyed either currently provide childcare center assistance, or plan to within the next three years.” These companies were all larger sized companies. It seems that with the larger companies it is more economically feasible to provide childcare services than with a smaller company. On-site childcare is shown to offer several benefits. According to Schandl in 92 on-site child care reduced absenteeism in the companies studied compared to companies that don’t offer services. Furthermore, companies that offered childcare options for sick kids reduced absenteeism even further. It seems that adults with children often miss work while their children are sick. Schandl goes on to say that studies have shown that on-site child care can also reduce turnover or increase retention. It seems that parents will stay with a company longer if child care services are provided. The final benefit I discovered is that a company providing this benefit can be eligible for tax credits. According to Rosenberg in 2001 the government offers up to $150,000 tax credit for up to 25% of the cost of opening and operating a child care center.
Analysis
On-site childcare services could be a useful tool for a larger company. There are several shown benefits that could help a company to retain employees and increase productivity. If employees are absent less they will be more productive. Furthermore, the company will save costs of training new employees if the employees they have stay longer. Employees that stay in their jobs longer inherently become better at their jobs and this will also help increase their productivity, as well. A company that offers these services also can get the tax credit which could help the company save a substantial amount of money during tax season. Because it’s a tax credit and not a write off even a company that shows very little profit would benefit substantially from this.
I recommend implementing a bonus system that is tailored to our company’s needs. Due to the nature of bonus plans we can tailor one to fit our company’s structure and its goals. We should also use different goals and bonus structures for the different divisions in our company. For example, setting up a bonus system for the delivery guys based on delivery efficiency while doing a bonus system for the production based on producing a certain amount of product. Most studies show that if a company implements the bonus structure in the proper way it will increase the company’s productivity. Finally, because our company only has about 100 employees, using a bonus system would allow the company to pay our employees more when the company is doing better and less when the company is doing worse. This would free up cash for operations.
I recommend that stocks be used as part of the compensation package for high level management and/or company officers. I am not recommending that we use stock options but instead an issuance of a predetermined amount of actual stock. There are too many conflicting studies on the effects of stock options on risk taking to be sure if risk taking is increased or decreased through the use of stock options. However, if we issue stock when goals are met the people receiving the stock will be more in line with the company’s best interest. Because the stock will be issued regardless of what the price of the stock is; this will cause the people receiving stocks to evaluate the best way to raise the value of the stock. This will tie the risk of the recipients with the company’s.
I recommend that a company specific budget and evaluation be done for an on-site child care center. Our company is not as big as most of the companies that provide this service. However, these can be very beneficial to the company. We need to evaluate how many people would use the service and if our smaller company could afford to provide the service. If it would be financially viable and enough people would use it. I would recommend a plan to implement the system. The implementation would provide financial benefits through tax credits and increase employee retention.
In conclusion, there are three potential alternative compensation methods that we should consider implementing. Bonus plans are very flexible and can be tailored to fit the specific needs of the company. They have been shown to increase productivity when implemented correctly. They can also free up cash for other things as they can be tied to the company’s profit. Stock options or a stock issuance can be a good part of the compensation package for upper level management. If we use stock issuance for part of the compensation it will closely tie the financial interests of the upper level management with those of the company’s. Onsite child care services are not as widely used as the other two forms of compensation/benefits but they do show some really good benefits for a company that uses them. The key to implementing this program would be having enough employees using the system to justify the cost of the program. The benefits of implementing this program would be increased employee retention and financial benefits through tax credits.
References
Smyth, R.C. (1959). Bonus Plans for Executives. Harvard Business Review, 37(4), 66-74
Lowery, C.M., Beadles II, N., Petty, M.M., Amsler, G.M., & Thompson, J.W. (2002). An Empirical Examination of a Merit Bonus Plan. Journal of Managerial Issues, 14(1), 100.
Gabris, G.T., Mitchell, K., & McLemore, R. (1985). Rewarding Individual and Team Productivity: The Biloxi Merit Bonus Plan. Public Personnel Management, 14(3), 231
Wyld D.C. (2011). Do Employees View Stock Options the Same Way Their Bosses Do?. Academy of Management Perspectives, 25(4), 91-92.
Martin, G., Gomez-Mejia, L., Wiseman, R. (2013). Executive Stock Options as Mixed Gambles: Revisiting the Behavioral Agency Model. Academy of Management Journal, 56(2), 451-472.
Hannes, S., & Tabbach, A. (2013). Executive Stock Options: The Effects of Manipulation on Risk Taking. Journal of Corporation Law, 38(3), 533-566
Schandl, K.M. (1992). The Significance of Employer-Supported Child Care. Benefits Quarterly, 8(3), 81-85
Frazee, V. (1996). Onsite Child-care Program Ranks First. Personnel Journal, 75(6), 21.
Rosenberg, L.F. (2001). Child Care May Get Boost From Tax Credit. Business Insurance, 35(31), 3-34