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Application: Course Project Equity-Based Compensation
Total reward programs can include the use of various pay-for-performance initiatives in the form of short-term or long-term incentives. In general, short-term incentives work very well in customer-focused industries. For example, hospitality and tourism industries can use customer feedback on satisfaction surveys to provide bonuses or recognition-based rewards. The retail industry might provide attendance and years of service rewards, since high turnover rate is a common problem. In other settings, such as manufacturing, rewards might be based on operating efficiencies and gains in productivity.
In theory, long-term incentives ("equity-based" compensation) help to promote long-term employee buy-in, since the longer the employee helps the organization achieve strategic goals, the greater his or her reward. Both forms of incentives are aimed at increasing success rates of an organization, revolving around the achievement of strategic objectives.
To further explore equity-based compensation, consider providing stock options to employees, one common form of equity-based compensation. The employee wishes to grow the value of the stock he or she holds, in hopes of increasing the value of his or her profit shares. In addition, the employee may gain more stock shares the longer he or she is at the organization. This type of equity-based compensation can vary from one organization to another. Organizations might choose to provide restricted stock, employee stock purchase plans, or stock appreciation rights, dependent upon their organizational needs and goals. Despite the form used, this specific type of equity-based compensation can provide employees with a greater sense of ownership in their organizations, and may help to align employee interests with the interests of company shareholders.
Continue your work with the company from the scenario introduced in the Week 4 Assignment. This week, explore how to incorporate equity-based compensation into the company's pay structure and expand on the information you included in your business proposal.
First, review the scenario from Week 4 to familiarize yourself with the company, its needs, and your team's role in developing a formal pay structure. Then read the scenario below, which builds on the initial scenario from Week 4. Lastly, conduct research in the Walden Library on different types of equity-based pay, as well as the various organizational outcomes that can result from implementing each type of pay.
Scenario
After reading the proposal you submitted last week, the general manager (GM) has decided to hire your HR firm to design a pay structure for his company. However, he noted that your proposal was lacking information about equity-based compensation that could be incorporated into the company's total rewards package. Some of the proposals submitted from other HR firms suggested that equity-based compensation would be an appropriate option because of the company's rapid growth in the market.
The GM is persuaded that equity-based compensation would be beneficial for the achievement of the company's strategic goals. He read in a business magazine that employees who own shares of their organizations are more cost-conscious, have a broader view of their organizations, and perform better overall than those who do not own shares. In addition, he feels that equity-based compensation would make the company more externally competitive.
In this phase of your work with the client, you will present recommendations (with supporting rationale) for forms of equity-based compensation that may be appropriate for the company at this time. Include an analysis of how external competitiveness would be affected by specific types of equity-based compensation. In addition, assess the impact of equity-based compensation on employee motivation.
Answer to the following in a 3- to 5-page paper:
• Analyze types of equity-based compensation.
o Explain two types of equity-based compensation that are most appropriate for this company.
Justify why the types you selected are appropriate, and describe how they are commonly used by organizations.
o Explain how the two types you selected could be incorporated into the company's total rewards system.
Provide a recommendation for pay level and mix, incorporating base pay with the two types of equity-based compensation.
o Describe the use of employee stock ownership plans (ESOPs) as an incentive or as a qualified pension plan.
How do ESOPs differ in these two uses?
Would you recommend ESOPs for this company? Why or why not?
Assess how equity-based compensation motivates employees and prospective talent.
o Explain how your recommendations for equity-based compensation at this company could motivate current employees and attract prospective talent (increase external competitiveness).
Refer to at least one motivational model in your response.
o Other than equity-based compensation, what performance-based incentive plans could help to further motivate employees?
Identify risks associated with incorporating equity-based compensation and pay-for-performance incentives.
TEXT: Milkovich, G. T., Newman, J. M., Gerhart, B., & Martocchio, J. J. (2011). Compensation and benefits(custom text). New York, NY: McGraw-Hill Irwin.