What are some organization-wide and executive incentives?

There are two major categories of organization-wide and executive incentive plans:

• cash-based, either organization-wide or limited to executives, and
• stock-based, with or without employee investment.

Company-wide profit sharing is an example of a company-wide cash incentive plan. It is based on overall company results, an equitable distribution and cash or deferred options.

It offers the advantages of employee awareness of company profits, a profit focus and variable cost. Such an incentive plan, however, suffers from employee perception of a lack of control over profits. This incentive plan can also be a questionable motivator and may result in compensating employees just for being members of the organization.

Executive cash incentives do not suffer from the perceived lack of control over profits as does company-wide profiting sharing because executives naturally exercise much greater control over profits than do employees in general. These incentive plans are funded based on company performance and may also be dependent upon business unit results as well as individual results.

The advantages of executive cash incentives include the fact that they serve as "attention getting devices" and thereby communicate organizational goals. They also create variable costs, link pay to performance and help employers maintain their competitive position where the incentives of opposing employers are matched. However, executive cash incentives can create unfavorable "class" distinctions. In addition, it may be difficult to set goals and to measure individual performance.

Stock options, which are rights to purchase at today's price shares of company stock at a future date, are an example of an investment stock-based incentive plan. They have the advantage of being cost effective because they do not change company earnings. However, the Financial Standards Accounting Board is working on rules that may change this situation.

Stock options also link participants to shareholders since stock appreciation is a common interest of both groups. On the other hand, dilution of earnings per share (an important measure of corporate vitality) is a drawback of stock options. Also, participants in stock option plans may in fact not be able to control stock price.

Qualified stock purchase plans under Internal Revenue Code Sec. 423 are another example of an investment stock-based incentive plan. They have been described as the "poor person's stock option," which reflects the fact that all employees are eligible.

Qualified stock purchase plans operate through payroll deduction, and the option price may be the lesser of 85 percent of the market value when the option is granted or 85 percent of the value at exercise, thus supplying an incentive for employees to purchase the stock. Accordingly, they have the advantage of encouraging employee stock ownership. But they also compete with 401(k) plans. Further disadvantages are that market factor decides the price of the stock, and employees can sell the stock once they get it.

Stock awards are a good example of a no-investment stock-based incentive plan. This incentive scheme can take the form of restricted stock, stock bonuses or stock contributions. Of course, a major advantage is that no investment is required. In addition, employee stock ownership is encouraged. However, this scheme can also cause disadvantageous dilution of earnings per share and suffers from a lack of control of stock prices. There is also a charge against earnings.