However, this does not mean that Employee Stock Option Plans (ESOP’s) always work. In some cases, the objectives of both the employer as well as the employee are met. On the other hand, in many cases, Employee Stock Option Plans (ESOP’s) create a lot of problems. In this article, we will have a closer look at the downside of these ESOP’s. We will have a look at the downside from the point of view of the company as well as the employees.

Employee Stock Option Plans (ESOP’s): Disadvantages Faced by the Company:

Employee Stock Option Plans (ESOP’s) are always marketed as being financial instruments which bring democracy into companies. Many companies have reported high growth led by motivated employees and democratic decision-making process after Employee Stock Option Plans (ESOP’s) were introduced. Also, ESOP’s allow better financial management. The employees can defer smaller present payoffs for bigger payoffs in the future. Also, there are considerable tax advantages to using Employee Stock Option Plans (ESOP’s). However, there are many disadvantages as well. Some of them have been listed below.

• Complex: Employee Stock Option Plans (ESOP’s) make the capital structure of the company very complex. Since the company already has obligations towards its employees, raising additional capital in the form of debt or equity becomes very difficult indeed. This added complexity in a way nullifies the tax advantages that Employee Stock Option Plans (ESOP’s) provide.
• Uncertainty: If a worker decides to leave the company, the company must buy their stock options. This transaction usually happens at the market price. Hence, whenever an employee leaves the firm, the cash flow position of the firm is negatively affected. This forces companies to keep a lot of cash on hand. Hence, the opportunity cost for keeping these funds on hand is lost. Also, more workers tend to leave the company during a downturn. Hence, it is likely that the company may already be facing cash flow woes during this period. If the company is forced to buy back the Employee Stock Option Plans (ESOP’s), their cash flow situation might get significantly worse.
• No Clear Productivity Gains: There has been anecdotal evidence that Employee Stock Option Plans (ESOP’s) drastically increase the morale and the productivity of the employees. However, there have been no facts which can conclusively prove this. Empirical studies have failed to show this correlation. In fact, data shows that only stock options are not good enough for increasing employee morale. They need to be able to have more influence in the workplace for the setup to be truly democratic.

Employee Stock Option Plans (ESOP’s): Disadvantages Faced by the Employee:

The anecdotal stories of Employee Stock Option Plans (ESOP’s) multi-millionaires are more the exception than the norm. Employees also face several disadvantages when they accept a large chunk of their compensation in the form of Employee Stock Option Plans (ESOP’s). Some of them have been listed below.

• Lack of Diversification: When employees are compensated through Employee Stock Option Plans (ESOP’s), a large portion of their retirement savings are invested in the company that they work for. Hence, in case the company goes bankrupt, not only do the workers lose their jobs and insurance but they also lose a large chunk of their retirement savings. This is exactly what happened in Enron. It is estimated that employees who are compensated in ESOP’s have as much more invested in the company’s stock than regular employees have in their 401(k). This lack of diversification can prove to be very dangerous for employees who are closer to retirement. The lack of diversification can bankrupt employees during a recession.
• Conflict Of Interest: Employees who receive Employee Stock Option Plans (ESOP’s) have as much invested in the company as the promoters do. However, promoters have visibility over the performance of the firm. They also have decision-making rights. Hence, it is possible that promoters may make decisions that may be good for them but bad for other shareholders like employees who hold ESOP’s. The objectives of the promoters and the employees are not really aligned.
• Voting Rights: Although companies claim that Employee Stock Option Plans (ESOP’s) bring a democratic work culture to the workplace, most of the companies do not give voting rights to employee shareholders. This leads to two problems. Firstly, shares without equal voting rights are considered to be less valuable in the market. Secondly, employees who hold these shares don’t really have any influence over the decisions being made by the company.

To sum it up, Employee Stock Option Plans (ESOP’s) are not as beneficial as they are claimed to be. They too have a lot of drawbacks which both parties need to consider before they decide to use the Employee Stock Option Plans (ESOP’s) as a method of compensating workers.

The previous articles in this module discussed how rewards systems are developed in organizations and the various aspects that go into making the rewards system viable. The discussion so far was on the components and factors affecting the rewards system. It is now the turn to discuss designing a comprehensive and total rewards system that takes into account both monetary and non-monetary rewards as well as building a holistic rewards system that factors in performance from all perspectives.

In other words, a total rewards management system takes a holistic look at performance from all angles and not only linear or quantitative measures alone. This means that employees are rewarded according to their performance that is apprised from all perspectives including their on the job performance, soft skills, contribution to the company, and teamwork and team building efforts.

Further, a total rewards management system does not provide monetary incentives alone but instead, includes non-monetary incentives like perks, motivational incentives like recognition, and self-actualization incentives like job satisfaction and quality of work.

Total Rewards Management Systems in Practice

The total rewards management system has to be designed after taking feedback from the employees as to whether they are satisfied with the current rewards structure and after consulting with market research firms about rewards systems in place in other companies in the same vertical.

Moreover, the total rewards management system has to incorporate the vision and mission of the organization and hence must be consistent with the specific attributes that are inherent to the organization and at the same time must be competitive in relation to the rewards systems of other organizations.

A total rewards management system must have the buy-in from all stakeholders in the organization. If all these requirements sound idealistic and not actionable in practice, it is important to remember that many world-class organizations like Apple, Microsoft, P&G, and Unilever have successfully designed total rewards management systems like the ones described here. Moreover, many multinationals like Fidelity have their own versions of a total rewards management system that caters to the need for financial incentives and emotional incentives as well as job satisfaction and self-actualization of the employees.

Motivation to get out of bed each morning and get to work

The key implications of such systems are that they provide the employees a reason to get out of bed each morning and go to work with a spring in their step.

In other words, employees are encouraged to be at their best because of these rewards systems. This is certainly not lost on the stakeholders who then perpetuate the system by tweaking it and ensuring that the total rewards management systems are constantly updated with new feedback.

Final Thoughts

Finally, no employee exists in a vacuum and hence, comparisons with peers are inevitable. Hence, any holistic rewards management system would take into account the need of the employees for peer approval and reduction of peer pressure. This is the key aspect that is often overlooked when designing rewards management systems.

If you are an employee in a corporation or are aspiring to join one after your graduation, one of the key factors that would determine whether you join a particular organization or not is the financial aspect. The salary and the bonuses that you get as part of your package determine largely your choice of a job.

In other words, apart from the non-monetary rewards like job satisfaction and fulfillment, the monetary incentives like salary and bonuses play a huge role in determining your choice of a job. In this respect, while salary and its role in rewards management has been extensively discussed earlier, it is time to look at how the mid year and the annual bonuses are parceled out to employees in corporations.

For instance, in many companies it is the practice to have bonuses pegged to the basic salary and then throw in added incentives like team performance linked bonus, group performance linked bonus, and organization performance linked bonus.

In other words, apart from the bonus that you get for your individual performance, you also get a bonus for the team and company performance. The rationale behind this is that you would be motivated to be a better team player and a better organizational employee.

Bonuses in the Banking Sector

For those aspiring to join the banking sector and especially investment banks, the bonuses in this sector are usually 100 to 200 percent the annual pay.

Indeed, the huge bonuses are what attract the creme-de-la-creme to join investment banks, as the annual bonuses would translate into the investment bankers earning obscene amounts of money. Of course, the rationale behind such large bonuses is that investment bankers and their performance matters a lot than in other sectors as the bankers can make the difference between success and failure in a multimillion-dollar deal.

While in recent months there has been a clamor over such large bonuses for bankers, Wall Street and pretty much all over the world, the bankers are still taking home large bonuses. This is the main reason why many management graduates dream of being in investment banks.

The other reason why such large bonuses prevail in the banking sector is that in most cases, the bankers handle sensitive and complex deals apart from running the risk of being fired if the deals go awry. Hence, the performance or otherwise is reflected in the bonuses that get every year.

Bonuses in the IT and Services Sector

In other sectors like IT and Services, the bonuses are crucial but not as important as the banking sector. This is because these sectors are staffed in large numbers where the organization as a whole has to do better than individual employees and hence, the rewards system is geared towards incentivizing the individual performance along with the holistic approach to organizational performance. Of course, this is not to say that the IT and services sector treats bonuses as an afterthought.

Indeed, as one goes up in the hierarchy, the bonuses become bigger and more important since as in the case of bankers, the senior management is expected to deliver according to their vision, and business acumen along with hard work and commitment. However, at the entry and the middle level, the bonuses are flat as the nature of the business, which are volumes driven at the levels means that the salary is more important than bonuses.

Apart from this, in traditional manufacturing companies, it is the norm to have bonuses paid out at festival times and seasonal bonuses and hence, it is the case that bonuses matter in this sector as well.

Closing Thoughts

Finally, bonuses must be paid out in a way that would motivate the employees and make them feel that they are getting something “extra” and not merely their salary.

In other words, who does not like being rewarded and this must be the guiding spirit when bonuses are decided. If this is missing, then the employees feel let down and this leads to a general lowering of performance standards. This must be avoided at all costs by the organizations.

Perhaps the most important aspect in any organization is the reward system in place. This is because employees are not providing their services for free and on the other hand, the organizations do not run a charity show. What this means is that the contractual obligations between employees and organizations are about how much work is to be done and how much pay is to be paid for the work done. Hence, the reward policies must reflect this aspect.

However, a significant aspect about the reward systems that is usually ignored is that employees have intrinsic needs other than monetary needs alone. This intrinsic need for recognition, better treatment, and rewarding of their good work forms the other pillar on which the reward system and the reward policies stand.

Monetary Reward Policies

The obvious and natural choice of any reward system is the provision of monetary incentives. This means that pay hikes, bonuses, and allowances that are monetary in nature play a key role in motivating employees. These extrinsic rewards cater to the basic needs of employees to sustain themselves and their families. An ideal reward system would provide for graded pay increases and bonuses that are in tune with industry best practices and are coordinated across the organization without discriminating against specific departments or divisions. Further, the monetary incentives should also not discriminate based on gender, ethnicity, or other aspects of identity. The reward policies must also take into account the fit between the employee and the role that he or she performs. There is no point in having a wrong person for the right job or a right person for the wrong job.

Non-Monetary Reward Policies

As discussed in the first section, a reward system that incentivizes the intrinsic needs of employees is an ideal system. This is not to say that extrinsic rewards like pay and bonuses are not important. Rather, the combination of external rewards and non-monetary rewards like recognition, awards, and publicity for the employee’s good work is the key to actualizing performance.

In other words, the ideal reward system manages to reward good performance both with monetary and non-monetary incentives.

Some non-monetary rewards can also include benefits and benefits like memberships to exclusive clubs, company provided housing and transport, and advanced training and soft skill upgrading courses that motivate employees to self-actualize themselves. For instance, companies like Fidelity focus more on the package of benefits at senior levels, which includes a gamut of non-monetary rewards like the ones mentioned above. Further, periodical prizes and publicizing the efforts of top performers is done in many companies including IBM and Infosys.

Closing Thoughts

It is not enough if employees are paid handsomely or they are recognized. The ideal reward system would incentivize the employees to perform to their potential by matching their intrinsic needs with the external rewards. Many companies have put in place rewards systems and reward policies that recognize this aspect of fit between the different needs and the alignment of an employee’s skills with that of the role that he or she is performing.

The previous articles discussed the theme of rewards and their uses in modern organizations from multiple perspectives. The focus of the discussion was on how an effective rewards management system can boost productivity and improve job satisfaction leading to all round benefits to the companies and their employees.

This article discusses the cutting edge research in rewards management that has been studied in a recent book, Give and Take, by the noted Wharton Professor, Adam Grant. This research that has been published in 2013 notes that organizations are made up of employees who can be classified as givers, takers, and matchers.

The givers are the ones who proactively help others and build great teams whereas the takers are the ones who are always receiving help instead of giving back to the team. The matchers are evenly poised with their attitude of giving as much as they take and nothing more.

The givers operate in high performance cultures where they help others, share knowledge, offer to mentor other employees, and make connections without expecting anything in return.

The takers dominated culture on the other hand thrives by expecting others to help them as much as possible without giving anything in return. Of course, the research showed that most organizations fall somewhere in between with an equal amount of give and take and hence, these cultures are known as matcher cultures.

Design Rewards Systems to Encourage the Givers and Screen out the Takers

The implications for rewards management are that the rewards systems must encourage employees to seek and provide help, and reward these employees more than the matchers or the takers, and should screen out the takers so that they do not garner a major share of the rewards. This is a sure fire formula for success in the modern workplace.

The key point here is that in an organizational culture that encourages reciprocity there are fewer conflicts between employees and the rewards management systems must be geared towards encouraging the employees to both seek and provide assistance.

In many multinationals during the induction training, employees are told to not keep knowledge to themselves like they did in college and remember that now they are operating in a team environment where knowledge is to be shared instead of horded. The rewards systems likewise are tailored to ensure that the givers are encouraged and those who are selfish are sidelined.

Closing Thoughts

Of course, it is easier said than done to implement giver cultures as the research proved. Employees most often struggle to make the transition from a competitive culture to a cooperative culture since the incentives are still aligned to results.

Hence, the implications for organizations are that their performance appraisals and rewards systems must include bonuses for those who contribute to the team the most and this has been proved in the research as well.

Finally, organizations must not view the rewards system as a zero sum game where the balance between the givers and the takers evens out. Instead, the rewards systems must be designed in a manner that would create synergies between the teams.

This article proceeds under the premise that performance by employees on the job needs to be assessed on a holistic basis. For all of you who are aspiring to make a name for themselves in the corporate world, you need to remember that corporates judge you based on on job performance and the demeanor that you display. While the former is easy to understand as it relates to delivering consistent, repeatable, and accurate results, the latter is sometimes taken for granted.

In other words, the attitude that you show on the job, your communication skills, your leadership abilities, the levels of motivation, and finally, the ability to articulate the big picture are secondary bases of performance. What this means is that you cannot simply think that delivering lines of code, or meeting sales targets alone is enough in the real world. The other attributes are equally important and as studies done on emotional intelligence show, the ability to empathize with others, motivate and lead others, and the ability to rise to the occasion are determinants of job performance.

Rewards for Performance

The previous section set the context for a holistic approach towards performance management. If we now consider the rewards structure for such performance, we find that the performance as determined by the above parameters needs to be rewarded appropriately.

In other words, the appraisal at the end of the performance cycle has to translate into grades that reflect the basket of attributes described above.

An ideal reward system would be made of financial and non-financial measures that include bonuses, pay hikes, and non-financial measures like perquisites and benefits that can be converted to monetary values but are inherently rewarding in a non-monetary sense. This means that companies ought to take a holistic approach towards performance and not merely based on narrow results, which without the presence of soft skills and emotionally intelligent behavior would lead the company nowhere.

Rewards should be unbiased and non-discriminatory

Often, it is the case that superiors have favorites among the employees and this leads them to reward those favorites and discriminate against those who are not in their good books. As mentioned above, truly excellent companies inculcate an organizational culture that is non-discriminatory, unbiased, and free from prejudice and harassment. Hence, the reward structure in these organizations follows the principles of fairness, justice, and equity. Of course, in many companies, the tendency to play politics and have favorites is too hard to resist for many. Therefore, without getting into idealistic notions, it has to be mentioned that unless companies evolve reward systems that are at least consistent with basic fair play principles, their organizational cultures would be better off in the longer term.

Final Thoughts

Before concluding this article, one has to reiterate that the reward system must motivate rather than depress the employees and studies have shown that most employees leave organizations because of their immediate bosses. To phrase it differently, attrition is because employees leave bosses rather than companies. Hence, the reward systems must be devised in a manner where the immediate boss does not have final say and instead, 360-degree feedback and escalation mechanisms are available to the employees.

All of us need to be motivated to get work done.

We might be motivated by the lure of financial rewards like bonuses, pay hikes, and other monetary benefits.

We also might be motivated by recognition, reward, fame, and glory.

Thirdly, there are some of us who are motivated by the fulfillment that comes from doing a good job.

Finally, we might be motivated by altruistic desires of helping society and building a better world.

This is the model of motivation that has been described by the legendary organizational behavior theorist, Abraham Maslow. The different levels of motivation in each case correspond to the different life stages that an individual goes through and hence, the level of motivation and the drivers of motivation vary from individual to individual.

The Hygiene theory makes the case for the presence and absence of motivators. In this theory, we would be demoralized if the motivators are not in place and when they are in place, the base level of motivation is guaranteed. Hence, the implications of the theories of motivation are that rewards (financial and non-financial) play an extremely important role in motivating individuals.

Reward Systems

Given the background described above, organizations must evolve reward systems that motivate each individual according to his or her level of self-development and need for either monetary benefit or fulfillment imperative. In this context, it is important to note that many multinational companies have a financial component that motivates employees and a non-financial component like honoring the employees, publicizing their achievements, and making senior management talk to these employees for their contributions.

The point here is that both financial and non-financial rewards are important for individuals to be motivated and organizations must design reward systems that take into account these aspects.

In many companies, it is the practice to earmark certain employees as those in the “Fast Track” or “High Potentials” and then devise specific reward systems for these employees. This is the practice in companies like Infosys where employees are identified early on and appropriate reward systems designed to ensure that they retain their motivation levels throughout their careers with the company.

The important aspect here is that one need to stay focused and motivated throughout one’s career and it is easy to lose focus and be demoralized at each stage of one’s career. As those in the corporate sector would attest, once one loses focus and is distracted, the downward slope is swift and steep. After all, in many sectors, the last performance is the one, which counts, and hence, there is a need for individuals to stay focused throughout.

Closing Thoughts

Organizations must match the reward systems with the motivational needs of employees and hence, the package that they offer to potential and existing employees must be a mix of financial and non-financial rewards.

As economists would point out, the role of incentives in motivating employees is indeed high and hence the right kind of incentives must be rolled out. It is not simply enough if companies keep raising the salaries or giving higher bonuses. It is also not enough if companies flatter their employees and publicize their achievements. The key aspect is the match between the rewards that are offered to the employee and his or her inner needs.

The previous articles in this module discussed how companies must be cognizant of the market trends when deciding on compensation and nonmonetary rewards. This is especially the case when premium talent has to be rewarded.

Since top quality talent would migrate to the companies where they are rewarded adequately, so companies in order to retain them must make market rate surveys and engaged in research of the reward structures in other companies in the same industry.

Further, even to retain the other talent, companies must research the minimum market rates for hiring employees so that they can base their compensation policies accordingly.

The key theme here is that in order to be competitive companies must gauge the mood of the market as well as understand how their competitors are paying and the kinds of reward systems in place there. This is especially the case with the IT Industry where the competition for talent and top quality talent is intense.

Some Real World Examples

Many companies in the emerging markets like India, China, and Brazil conduct market rate research to understand how global companies are paying their employees. Since these emerging market companies want to emulate and imitate the pay structures of the multinationals, they often benchmark their reward systems against these companies.

In India, many companies like Infosys and Wipro have set their compensation strategies after researching the strategies of multinationals and though the base pay is much lower, they follow the broad components of the pay structure.

Further, with many multinationals like Fidelity following global and world-class norms in nonmonetary and monetary reward systems, they are the examples and the role models for other companies to follow suit. In this manner, the entry of global companies is indeed a positive development in terms of the reward systems.

Process of Market Rate Surveys and Reward Research

The way in which companies undertake market rate research is by hiring market research consulting companies to perform a salary survey and to find out each year how much hikes the other companies are handing out.

By engaging the services of these firms, companies would know the industry trends and would ensure that they are not behind or too much above the industry norms.

In the context of the ongoing global economic crisis, it has become more necessary than ever to conduct market rate research as companies must know the industry standard for the hikes and then base their annual increments accordingly. These are some of the practices that companies resort to when deciding on the quantum of hikes and pay increases every year.

Closing Thoughts

Finally, as in business terms, the companies have to be competitive in terms of salary hikes and reward systems as well. Hence, there is a compelling need to understand the industry trends and base one’s compensation system accordingly.

As mentioned earlier, only those companies that manage to be competitive are among the most preferred employers where top quality talent migrates.

In recent years, the topic of excessive executive pay has been at the forefront of efforts to promote good corporate governance. This is because there have been understandable and genuine concerns about this aspect, which is leading to, some effects on the governance structures of companies. For instance, the CEO of Wal-Mart takes home a pay that is 150 times more than the lowest paid worker is. This is indeed a matter of concern as in an ideal scenario, the gap between the lowest paid worker and the CEO must not exceed double digits and that too within a multiple of 50. Further, the fact that greed leads people to do things that they would not otherwise do is a truism that has to be taken into consideration in this respect.

Apart from this, excessive executive pay is having a corrosive effect on organizational cultures, which results in heartburn and a sense of powerlessness at the lower levels of the hierarchy.

Misalignment of Incentives

One of the reasons put forward for the ongoing global financial crisis is that the misalignment of incentives or the culture of unrestrained risk that was brought about due to greed manifested in the corrupt practices at the core of the financial crisis.

The misalignment of incentives we are talking about relates to paying the bankers and the CEO’s too, much, which led them to take greater risks in the hope of garnering ever-larger bonuses. As the aftermath of the crisis proved, with so much at stake and since the CEO’s and the bankers are human after all, there was inevitable corruption starting from the top. Because the reward systems did not incentivize only performance measured in a broad index but rewarded humungous profits at the expense of everything else, there was a tendency to throw caution to the winds and indulge in risky behavior.

Some Strategies to curb Skyrocketing CEO Pay

A possible strategy to limit skyrocketing CEO pay would be to design a reward system that places performance at a premium but limits how much of it can be translated into monetary and non-monetary terms. For instance, making CEO’s accountable for a broad range of performance measures like corporate responsibility, organizational dynamics like culture and wellbeing of employees, apart from profits and bottom line imperatives alone would be a reward system that is holistic in nature. Further, making the CEO’s accountable to their shareholders in a more direct manner would place curbs on excessive CEO pay, which has been the topic of many heated debates in company AGM or Annual General Meetings.

Closing Thoughts

Given the fact that excessive CEO pay has deleterious effects on organizational health and that this has contributed in some measure to the ongoing global economic crisis makes a compelling case for limiting the CEO pay. The reward systems must be designed in such a way as to incentivize performance but not excessive risk. Finally, the reward systems must take into account the fact that the CEO alone does not make the company exist but it is the combined efforts of all employees that keeps the ship afloat.

This is the basic determinant of the pay that is given to an employee. This is the entry-level criterion wherein the skills of the employee are first determined and the pay fixed accordingly. Next, the performance of the employee during the appraisal period forms the basis for the salary hike and the bonus given to him or her.

The point here is that when a person is hired, there is no way to determine whether he or she would fit within the company or would perform according to or exceed expectations. Hence, the skills and experience are used to determine the pay and subsequently the performance is used to hike the salary.

Position in the Hierarchy

We have discussed how the skills and performance of an employee is one of the determinants of pay. Apart from that, the position in the hierarchy is another key determinant of pay. For instance, in many companies, it is routine to raise the compensation by a quantum jump as soon as the employee is promoted to the managerial level.

Further, there is a jump when the managerial level employee is promoted to upper middle management and senior management. What the companies are doing here is to reward these employees for making the successful transition from followers to leaders and from managers to executive positions. Hence, the position in the hierarchy is an important determinant of the level of pay that an employee receives.

Alignment of Attributes and Role

Perhaps the most important determinant of the pay given to an employee is the alignment between the individual’s skills and attributes and the role that he or she is assigned. For instance, in many companies, a periodical evaluation of the match between the attributes and the role is carried out to determine whether the employee is doing justice to the role and whether the organization is doing justice to the employee by placing him or her in an appropriate role. After all, one cannot have the right person for the wrong job and the wrong person for the right job.

In some companies, it is common for employees during the appraisal time to demand that they must be placed in another role and it is also common for the managers to move the employees into other roles. Indeed, as discussed in pervious articles, the match between the employee and the role is of crucial importance as the level of pay that an individual is getting depends on the role that he or she is playing. There is no point in rewarding nonperformers at a certain level when they are not delivering according to expectations. Similarly, there is no point in devaluing a performer by keeping him or her in a role, which is significantly lower than their skills and performance.

Closing Thoughts

We have discussed the factors that determine the level of pay. As can be seen from the preceding discussion, both qualitative and quantitative parameters are used to determine the level of the pay that is paid to the employee. A separate topic is executive compensation, which in recent years has been driven by market sentiment rather than these determinants alone. The topic of executive compensation has been discussed in other articles.