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PROJECT REPORT COMPENSATION METHODS IN I.T. SECTOR
EMPLOYEE STOCK OWNWERSHIP PLAN
Employee Stock Ownership Plan(ESOP): is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for.
How does ESOP work?
Merit Pay is an incentive plan implemented on an institutional wide basis to give all employees an equal opportunity for consideration, regardless of funding source. The merit increase program is implemented when funds are designated for that purpose by the institution's administration, dependent upon the availability of funds and other constraints. .
Advantages oF Merit Pay :-
Gainsharing is a technique that compensates workers based on improvements in the company's productivity.
How does Gainsharing work? A Company shares productivity gains with the workforce. Workers voluntarily participate in management to accept responsibility for major reforms. This type of pay is based on factors directly under a worker’s control (i.e., productivity or costs). Gains are measured and distributions are made frequently through a predetermined formula. Because this pay is only implemented when gains are achieved, gainsharing plans do not adversely affect company costs.
What are the 'Gains' that are measured?
What are examples of Gainsharing formulas?
Calculate gain in hours: The actual hours worked minus the expected hours (for the given level of output) equals the gain in hours.
Profit Sharing is an incentive based compensation program to award employees a percentage of the company's profits.
How does Profit sharing work? The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. Generally this is done on an annual basis
How to Choose an Employee Stock Plan for Your Company:-Many companies we encounter have a pretty good idea of what kind of employee ownership plan they want to use, usually based on specific needs and goals. However, sometimes they might be better served by another kind of stock plan. And yet others say they'd like to have an employee ownership plan, but they're not sure what it might be. This article will start you down the path to choosing and implementing the plan or plans best suited to your company.
ASSESSMENT OF PLANS FOR BROAD-BASED EMPLOYEE OWNERSHIP
Let us begin by quickly reviewing the main possibilities for broad-based employee ownership. A "broad-based" plan is one in which most or all employees can participate.
An employee stock ownership plan (ESOP) is a type of tax-qualified employee benefit plan in which most or all of the assets are invested in stock of the employer. Like profit sharing and 401(k) plans, which are governed by many of the same laws, an ESOP generally must include at least all full-time employees meeting certain age and service requirements. Employees do not actually buy shares in an ESOP. Instead, the company contributes its own shares to the plan, contributes cash to buy its own stock (often from an existing owner), or, most commonly, has the plan borrow money to buy stock, with the company repaying the loan. All of these uses have significant tax benefits for the company, the employees, and the sellers. Employees gradually vest in their accounts and receive their benefits when they leave the company (although there may be distributions prior to that). Over 8 million employees in over 11,000 companies, mostly closely held, participate in ESOPs.
A stock option plan grants employees the right to buy company stock at a specified price during a specified period once the option has vested. So if an employee gets an option on 100 shares at $10 and the stock price goes up to $20, the employee can "exercise" the option and buy those 100 shares at $10 each, sell them on the market for $20 each, and pocket the difference. But if the stock price never rises above the option price, the employee will simply not exercise the option. Stock options can be given to as few or as few employees as you wish. Perhaps 7 to 10 million or more employees in thousands of companies, both public and private, presently hold stock options.
An employee stock purchase plan (ESPP) is a little like a stock option plan. It gives employees the chance to buy stock, usually through payroll deductions over a 3- to 27-month "offering period." The price is usually discounted up to 15% from the market price. Frequently, employees can choose to buy stock at a discount from the lower of the price either at the beginning or the end of the ESPP offering period, which can increase the discount still further. As with a stock option, after acquiring the stock the employee can sell it for a quick profit or hold onto it for awhile. Unlike stock options, the discounted price built into most ESPPs means that employees can profit even if the stock price has gone down since the grant date. Companies usually set up ESPPs as tax-qualified "Section 423" plans, which means that almost all full-time employees with 2 years or more of service must be allowed to participate (although in practice, many choose not to). Many millions of employees, almost always in public companies, are in ESPPs.
Section 401(k) plan is a retirement plan that, unlike an ESOP, is designed to provide the employee with a diversified portfolio of investments. Like an ESOP, however, a 401(k) plan is a tax-qualified plan that generally must include all full-time employees meeting age and service requirements. The employees can choose among several or more choices for investments, and the company may make a matching contribution. Perhaps several million employees in a few thousand companies participate in plans with a heavy company stock component; company stock may be an investment choice for the employees and/or the means by which the company makes matching contributions. 401(k) plans may be combined with ESOPs (these are called "KSOPs"), where the company match is an ESOP contribution.
EMPLOYEE OWNERSHIP : COMPANIES PAY LESS FOR WORKERS' COMPENSATION COSTS
A study has found that employee ownership companies have lower workers' compensation insurance rates than comparable non-employee ownership firms. Leslie Hakala authored the study. She began the project as an NCEO research intern and completed it for a thesis requirement at Harvard University. The study was unable to ascribe a specific causal relationship between employee ownership and lower workers' compensation costs, but it did find that these costs declined as employee ownership plans matured.
Workers' compensation programs vary from state to state, but in most programs, insurers attempt to provide employers with an incentive to limit safety problems by developing an experience rating. The ratings compare an individual firm's experience with other firms of its type. If the rating is better than average, insurance premiums will be lower; if it is worse, they will go up.
In this study, we looked only at California firms. In California, employers are assigned a "manual rate," an insurance rate expressed as a percentage of every $100 of payroll. Rates are assigned to all companies based on their industry classification. These rates are then adjusted for companies with a premium above a certain level according to their actual experience. This means smaller and less risky firms are not assigned an experience modification rating. The experience modification rate is set for each year based on three years of past experience, excluding the most recent year (because data are generally not yet available). The experience modification rate is determined by looking at actual experience modified by a size weighting factor. For larger firms, the adjustment may be very small; for smaller firms, actual experience is given a lower weight because a single incident can skew results dramatically. This weighted experience rating now becomes the "experience modification" figure.
Theoretically, the average experience modification factor for any business classification should be 100%. A company with a good record would have a rating under 100%; a bad record would rate higher. These numbers are then multiplied by the manual rate to set the premium. In practice, the average rating is somewhat under 100.
IT COMPANIES WRITE NEW ESOP STORY
Will I ever get to exercise my stock options? It's the one question haunting IT industry professionals sitting on piles of employee stock options. All those who happily grabbed at ESOP's issued by their companies last year, have now been left holding pieces of paper that are, in some cases, worth a fraction of the price at which employees brought into them. Except for a few who have benefitted from older schemes like Infosys 1994 scheme, the great ESOPs dream is turning out to be a nightmare. Last year, if you were given ESOPs in an IT company, your friends, neighbours and everyone else went up like a blimp, companies issued ESOPs in cartloads. And employees brought into them, even at the higher prices that the grants came from.
A year later, the situation's something like this. Employees who were given ESOPs at the prices prevailing during the IT boom, had to sit back and watch their share prices hit the roof while they waited out the lock-in period. Now, they can exercise their options that is sell them, and pocket the difference between the exercise price at the time of the grant, and the current market price. It's resulted in a situation where employees have been left holding NIIT options which they would have to exercise at a price of Rs 1,593 or Silverline options, which they would have to exercise at a price of $25. At VisualSoft, for instance, all employees who were granted options have returned them to the company. Consequently, the company has terminated the ESOP scheme.
Theoretically, an employee who exercised his option now, would have to buy at the exercise price, sell at the current market price, and pay out the difference.
ESOPs HARDLY BENEFICIAL -
At the height of the IT euphoria in the markets, those employees saw their company's scrips scaling new heights, they could not benefit as the ESOP's had 1-2 year lock-in periods, and could not be sold. The lock-in period, also known as the vesting period in industry jargon, in the period during which the employee cannot convert his or her option into shares. To make matters worse, some companies has specified that the option had to be exercised, that is converted into shares, within a specified time frame after the lockin period expired. For instance, this was one year in the case of Silverline, and 10 in the case of Aptech.
ESOP IN INDIAN CONTEXT
EMPLOYEE STOCK PURCHASE PLANS (ESPPS)
Employee stock purchase plans (ESPPs) include both tax-qualified "423 plans," which about 2,400 companies offer, and nonqualified plans, which about 1,500 companies offer. Our estimates are based on data from ShareData's Equity Compensation Trends in America (1991), Hewitt Associates' On Employee Stock Ownership (1996), Hewitt Associates' Survey Findings: Employee Stock Purchase Plans (1998), and the National Association for Stock Plan Professionals' Stock Plan Design and Administration Survey (1998), especially the more recent studies. To estimate the number of employees covered under the plans, we took the total number of companies offering plans, multiplied those numbers by the average number of employees in the companies (13,207 for 423 plans and 17,790 for nonqualified plans), and multiplied that number by the average percentage of participation in the plans (34% for 423 plans and 17% for nonqualified ESPPs). Almost all companies with ESPPs are public.
Multiple Plans: Many companies offer multiple e plans, and many employees participate in more than one plan. For example, many ESPP participants are also in 401(k), stock option, or other equity compensation plans. Hence, the total number of participants in all these plans is definitely not the total of the numbers in the "Number of participants" column.
ESOPS AND CORPORATE GROWTH
Studies on participative management alone find a small positive impact on performance, but not nearly enough to explain the synergy between ownership and participation these other studies have found.