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Unit 10: Compensation and Benefits

traditional adversarial relationship between the two, most organization-wide plans require Notes
a high degree of cooperation. This is because both groups must focus on the desired cost
savings and listen to the other party. Various types of organization level plans are:

(a) Profit Sharing: Profit sharing is popular organization-wide programme that is often
classified as a gainsharing plan. This type of plan can be made much more simple
than a cost-savings plan. Nor does it require the revolution in employee-management
relationships that cost-savings plans do. With profit sharing, management hopes to
change employee attitudes toward the organization without a concomitant change
in managerial attitudes toward the employee. The idea behind profit sharing is to
instill in the employee a sense of partnership with the organization. But most plans
go beyond this and use profit sharing as a way to keep valuable employees and to
encourage thrift in employees. Profit sharing plans are typically differentiated on
the basis of when profit shares are distributed. Cash plans (known also as current-
distribution plans) pay out profit shares at regular intervals. Deferred plans put the
profits to be distributed in the hands of a trustee, and distribution is delayed until
some event occurs. This type of plan is most often tied into a retirement system.
Combination plans distribute a part of the current profits and defer the rest.
Profit sharing plans vary widely in provisions concerning organization contributions,
employee allocation, eligibility requirements, payout provisions, and other
administrative details. Two-thirds of the plans define the contribution of the
organization by a formula; in the balance, the board of directors determines the
amount. Most formulas specify a straight percentage of before-tax profit, after
reservations for stockholders and reserves. The amounts allocated to employees or
their accounts are usually based on their compensation, but may also be influenced
by their length of service, contributions, performance, or responsibility. In most
plans, all full-time employees are eligible immediately or after a short waiting
period, but a substantial minority of plans exclude union employees or are limited
to specific employee groups. Payout provisions are usually determined by plan
designation (cash, deferred, or combination), but deferred and combination plans
are increasingly incorporating vesting provisions and payout under a wide variety
of circumstances.
(b) Gain Sharing: This approach is broader than profit sharing. It is a more appropriate
organization-wide incentive pay plans. The purpose of gainsharing is to tie the
employee to the performance measures by which top management is judged and by
which society defines a successful organization. Although clear performance-reward
connections can be made in these circumstances, it is difficult to make a performance-
effort connection.

A number of different performance measures can be used in gainsharing, but all
share a common dimension: a baseline standard must be established to determine
where the organization is at the present time. The value of improvements in future
measures of performance is then shared with the employees. One set of performance
definitions rewards reductions in costs or improvements in productivity.
The most popular gainsharing plan is the Scanlon Plan. In this plan, employees are paid a bonus
if costs remain below pre-established standards. The standards have been set by studies of past
cost averages. Ways to reduce costs are developed by a series of committees throughout the
organization and a plant-wide screening committee that reviews and implements changes.
Although Scanlon developed this plan in 1937, these committees took much longer to pay out
profit shares at regular intervals as earned. Deferred plans put the profits to be distributed in the
hands of a trustee, and distribution is delayed until some event occurs. This type of plan is
ordinarily tied into a retirement plan. Combination plans distribute part of the profit share as
earned and defer distribution of the balance.

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