University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Manufacturers Inc. Compensation Stratagies
To my fellow Human Relations co-workers, upper management, and ownership: I have been asked to put together a report of different ways we can compensate the employees we have above and beyond their normal pay for the outstanding job they do . I have found that there are in fact countless ways that we can compensate them; however, I have compiled a list of the ways I feel would best suit our company. First there is the general pay raise/ bonus. With this we would increase the pay that our employees receive; however, there are drawbacks that would include our overhead drastically increasing. Next I have looked at Phantom Stock Plans. These are for our long term employees and intend on staying with our company. These are stocks that we give them that mimic the actual stock shares in our company without being real stocks. By doing this, the employee is motivated to help the company grow and profit, because they profit from this as well. I have also looked into Stock Appreciation Rights. These are also like the Phantom Stock Plans, however they are designed more for new hires in that they have no initial monetary value. The value of them grows as the company grows; however, they are not available for the employee to cash in until a certain time, which the company would designate. Finally, I have taken a look at implementing a 401(k) retirement plan for our employees. I have gone over and explained what all needs to take place for us to implement this compensation package for our employees, and how the 401(k) works. After extensive research, I have compiled a list of recommendations that I a sharing with the management and ownership of this company. These include the immediate incorporation of the 401(k) retirement plan, and the consideration of the PSPs and SARs into our employee’s benefits.
As a member of the human resources department at Manufacturers Incorporated I have been asked by my fellow human resources co-workers, as well as upper management, and ownership to put together a presentation on different types of compensation strategies and options. With these different types of strategies I have been asked to compare and contrast them to figure out which will be the best route for our growing company to pursue. Following my extensive research I have come up with several solutions that I believe may be very useful to our company. The first type of compensation that I have come up with is the general pay increases in our employees’ hourly compensation. The next deals with different incentives that we may be able to offer them, and means by which our costs may not be as drastically affected. These two different stock shares allow the employee to have the benefits of owning stock in our growing company without us as a company actually giving out stock. They are essentially mock stocks that grow as our company’s stock grows and becomes more profitable. The two different types of stocks options are Phantom Stock Plans and Stock Appreciation Rights. The final type of compensation strategy that I have researched is one that has to do with the future well-being of our employees when they decide it is time for them to retire. The retirement fund that I have researched is the 401(k) retirement fund plan. I believe that we as upper management and ownership should take part in the well-being of our employees, families, and their futures. I have put together a report of my findings for all of us to go over.
Finding Number 1: Raises/ Bonuses
The first strategy I have come up with is one where we increase monetary reward. Monetary rewards include salary, bonus, commissions, medical and health benefits, holidays, and retirement benefits. (SHR) Essentially we would be conducting performance reviews annually. A performance review is a meeting that we as upper management would have with each employee to discuss the results of their work, and the process they went through to get done what they did. The discussion normally involves an assessment of the employee’s initiative, problem solving abilities, attitude, professional demeanor, and other aspects of their performance. (Jenkins) After we have conducted the employee reviews, we would have a meeting with the floor managers from all three shifts to go over their opinions of how they feel each of their personnel have performed through the year. At this time we would also get the opinion on who they feel could handle more responsibility, and who may have too much responsibility or may not be performing up to the company’s standards. After we have had the meetings with both the employees and the managers, we will go through and give pay raises to those individuals we have decided are the most deserving. I believe that these raises should not solely be based on seniority, but on the feedback we have received from the managers who work with the personnel every day.
The downfall to this straight forward concept lies in that of its expenses. We are a company of over 120 employees. As of now our average employee makes $12.75/ hour while working 40 hours a week. Now given this is an average, so some employees do make more than others, but if we were to give every employee we have a $.25 raise annually, that is an additional $62,400 expense that we would incur every year. As of now, not including upper management, we have an annual salary expense of $3,182,400. Additionally we must consider $120 , for every dollar that we decide to give in annual bonus’. If we were to give out only $100/ employee in bonus’, then that would accumulate to an additional $12,000/ year. If we are to give these raises and bonus’ annually, realistically this is not possible compensation strategy for our company to incur.
Finding Number 2: Phantom Stock Plan
The second monetary compensation option that I have come up with is the phantom stock plan. These plans are something that are normally given to a company’s most loyal and long term employees who play a key role in the success of the company. (Schiff) The concept behind a phantom stock program is our company’s commitment to pay the employees we have chosen an amount equal to the value of a portion of the shares of the company’s stock. (Moynihan, 2010) What this will do for our company as a whole is the employees will take more interest in the company because they now have motivation to make our company grow. This is because they now are benefiting from the growth of the company in the way of the phantom stock plan. The phantom stock plan is normally structured so that the program tracks the economic benefits of actual stock ownership without giving up actual shares. (Moynihan, 2010)
The upside to having a phantom stock plan is one in which it is not going to affect us immediately in our finances. In fact I see only upside to this plan. We are going to be able to control how much phantom stock we want to give the individuals. Now keep in mind that we do need to make it enough that the employee feels empowered so they take a major interest in the well-being of the company. The PSPs are just like real shares, so they are going to have a dollar value at the time they are designated. Because of this they are essentially designed for our employees who have been here awhile. This is designed to reward them for the work that they have done in the past, and to encourage them to continue to build the value of the company because it is not only benefiting the company, but also benefiting them. (McGladrey, 2011)
Finding Number 3: Stock Appreciation Rights
The Stock Appreciation Rights or SAR is much like the Phantom Stock Plan; however, there are some differences. When the SARs are first implemented, there are no values to the shares of stocks when they are first given, unlike the PSPs. (Fidelity) Instead, SARs are based on fractional interest that accumulates between the difference of the value of the shares value at the time they are awarded, and the value of the shares at a future settlement time.
Because SARs are for the future benefit of the employee, these are something that we may want to consider for new employees in the company. (Fidelity) These for us in the future would pay out like the Phantom Stock Plans; however, it does give us the financial security in that the employee cannot cash in his or her SAR until a set date that we as a company have decided. With this, if the employee were to decide that they no longer wish to work for our company, and it is before the set date we have determined, then we are no longer obligated to pay that employee his or her SAR. Finding Number 4: The 401(k)
The final compensation strategy I have explored outside of the normal salary of our employees is sponsoring a 401(k) program. The 401(k) program first came into effect in 1978. Congress decided that Americans needed a better way to save for retirement. They thought if they gave people a way to save more money or retirement while lowering their state and federal taxes, that more people might do just that. (Obringer) With the 401(k), our employees will decide how much money they want to put into the account per month. We as the company would then make a payroll deduction and put that money into their personal retirement account. This is great for the employee, because the money that is deducted from their pay is not taxed, which in turn allows them to pay less in income tax. We then act as a plan sponsor for the 401(k). With this we then hire an administrator to take care of the plan and its investments. After we have set this up all we have to do is send the money to the administrator and they and the employee take care of deciding how it is invested. (CNN) As of 2012, employees are allowed to put up to $17,000 into their account each year. With that, we as the company would also put profit sharing amounts into their account, up to what they have invested themselves. (“What is a,” )
In turn, I believe that this would be a great way to help compensate the employees that we have here. For them its “free money” from us (Manufacturers Inc.) and it is helping them towards their retirement. The cost that it costs the company is up to the employee. As of 2012 an individual is able to designate up to $17,000 a year to this account. We have the choice to match that 100% or whatever percent we decide to contribute towards their retirement.
As a member of the Human Relations department here at Manufacturers Inc. I would recommend the following: Recommendation 1: Immediately implement a 401(k) retirement plan into action. For this I would suggest that we vigorously investigate what it takes for us as a company to start a 401(k) plan for our employees. Most people don’t want to have to work for the rest of their lives, and by helping them out with their dreams of retirement; we can help them get there quicker and give them something to work towards. As Harry Emerson Fosdick once said “Don’t simply retire from something; have something to retire to.” (“Quotations: retirement,” )This is exactly what we should plan to do for our employees. Recommendation 2: Follow up on the idea of implementing PSPs and SARs The idea of having money out there available to you for the hard work that you have put in and are yet to put in is going to be a huge motivator. I believe that if we were to put these plans in action based off of people’s performances, then it would motivate them to be the best employee that they can be and this company needs the best employees we can possibly get.
To finalize my findings, I have found that there are several different options of compensation strategies apart from our basic pay system that we could incorporate to help the employee morale and further the growth of our business. I have found that by increasing the pay to some of our key employees that we will incur a lot more expenses than we currently have the means for, however I have found that there are some better ways to compensate their hard work. I have found that the Phantom Stock Plan would be an outstanding way to further compensate the employees that have helped us grow to where we are now. By incorporating this plan, we can thank them for the hard work that they have put into our company already, and motivate them to continue working hard in the future. This is going to benefit them, because as the value of our company grows, so does the value of their stock plans, helping them make more money for their retirement. I have also found that Stock Appreciation Rights would be a great way to compensate our new employees. By incorporating this plan, it will give our new employees extra motivation to work hard and take pride in the work that they perform for us here. By having stock appreciation rights, it allows them to build value in the stocks that we have given them as our company grows with their hard work. This in turn will allow them to have extra money on top of what they have already made with their salaries through their stock appreciation plan.
Finally I have found that a 401(k) retirement plan is a fantastic way to compensate all of our employees. By doing this, it allows our employees a chance to save money for retirement tax free. It also allows them to get extra “Free Money” from us as we match what they are saving for their retirement. By doing this it is going to build loyalty towards our company, and give them motivation to work hard and further the growth of our company.
CNN. (n.d.). How does a 401(k) plan work?. Retrieved April 7, 2012 from http://money.cnn.com/retirement/guide/401k_401kplans.moneymag/index.htm Fidelity. (n.d.). About stock appreciation rights (sars). Retrieved April 7,2012 from http://personal.fidelity.com/products/stockoptions/aboutsar.shtml Jenkins, L. (n.d.). The performance review. Retrieved April 4, 2012 from http://www.salary.com/the-performance-review/ McGladrey. (2011). Lessons from recession increasing focus on incentive compensation programs. Retrieved April 6, 2010 from http://mcgladrey.com/Perspective/Lessons-from-recession-increasing-focus-on-incentive-compensation-programs Moynihan, D. (2010). Phantom stock—it’s alive!. Retrieved April 6, 2010 from http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/PhantomStock.aspx Obringer, L. (n.d.). How 401 k plans work. Retrieved April 7, 2012 from http://money.howstuffworks.com/personal-finance/retirement-planning/401k.htm Quotations: retirement. (n.d.). Retrieved April 8, 2012 from http://www.quotegarden.com/retirement.html Schiff. (n.d.). Phantom stock