Merit pay, Scanlon Pay, Profit Sharing Plan, ESOP, Gain Sharing, Earning at Risk plan

15/11/2020 0 By indiafreenotes

Merit Pay

Merit pay is a reward based on how well an employee has done the assigned job. The payment is based on individual employee’s performance. Rewarding the best performer with merit pay is a powerful motivation. Merit pay motivates the employees to work hard and achieve the assigned tasks. Merit pay may be in the form of lumpsum amount or as a percentage base pay.

Some of the problems in designing a merit pay scheme are:

  1. It is difficult to measure performance objectively.
  2. Employees, very often, fail to understand the connections between merit pay and performance.
  3. Bias in assessing performance.
  4. The superior may not be a competent evaluator.

Scanlon Pay

The Scanlon Plan developed by Joseph Scanlon is designed to involve the workers in making suggestions for reducing the cost of operations and sharing the gains of increased productivity. The plan has two components, i.e., financial incentive aimed at cutting cost and increasing efficiency and suggestion scheme. The suggestion received from employees is screened and evaluated by a committee. If the suggestion is implemented and successful, the employees usually share 75% of the savings and the balance is set aside for the months in which labour costs exceed standard cost.

Profit Sharing Plan

Profit sharing involves the determination of organisation’s profit at the end of the financial year and the distribution of a percentage of the profits to employees, qualified to share the earnings. To enable the workers to participate in profit sharing, they are required to work a certain number of years and develop some seniority. Profit sharing is an additional payment over and above regular salary payment. Professional management consider workers as partners in the production process and profit is an outcome of the efforts of employees and therefore it could be shared between employer and employees.

According to ILO, “Profit sharing is a method of industrial remuneration under which an employer undertakes to pay to his employees, a share in the net profit of the enterprise in addition to their regular wages”.

According to Henry Seager, “Profit sharing is an arrangement freely entered into by which the employee receives a share fixed in advance of the profits”.

Features of Profit Sharing:

  1. The proportion of the profits to be distributed is determined in advance.
  2. The amount to be distributed depends upon the profits earned by the enterprise and is computed on the basis of agreed formula.
  3. The employee should have some qualifications such as length of service to become eligible for the financial benefit.
  4. Profit sharing is reward for collective efforts of employees and is over and above wages.
  5. That are paid regularly.
  6. The extra payment is generally paid in cash. However, it can be in kind such as equity shares,
  7. Profit sharing may be on industry basis, locality, unit, department or individual basis also.

Objectives of Profit Sharing:

  1. To develop employer-employee relations and employee morale.
  2. To improve efficiency of operations by reducing costs and increasing output.
  3. To eliminate waste in the use of materials and equipments.
  4. To supplement the regular income of the workers.
  5. To provide group incentive for higher output.
  6. To provide for employee security in the case of death, retirement or physical disability.

Limitations of Profit Sharing:

  1. The payment is made only when the profit exceeds a particular limit and therefore the scheme does not guarantee payment to workers.
  2. During period of depression, it may not be possible for its management to make payment to worker.
  3. It gives equal benefit to all workers and there is no distinction between good and bad performance.
  4. Trade unions and workers feel that bonus payment is better compared to profit sharing.


Employee Stock Plan is one of the important pay for performance devices to attract and retain promising employees. It commands employee loyalty. Stock options are tremendous motivators because they directly link performance to the marketplace. The principle of stock option is to let employee add value to the company and benefit from it.

It is a form of compensation which enables the employees to purchase shares of their company and gain from possible rises. Under the scheme, employees who are eligible for receiving the award are they offered specified number of shares. They gain when the share prices go up. Stock options create wealth for employees without involving large cash flow to the company.

Types of Employee Stock Plans:

  1. Employee stock option scheme: The Company grants an option to its employees to acquire shares at a future date. The options are offered at a predetermined price.
  2. Employee stock purchase plan is followed in listed companies: The employees are given the right to acquire share of the company immediately after they earn them based on length of service/performance, normally at a price lower than market price. Shares issued will be subject to lock-in period during which the employee cannot sell them.
  3. Restricted stock plan: The employee need not put in money. However, shares are subjected to some restrictions. The employee has to continue to work in the company for a specific period, otherwise shares may be forfeited.
  4. Phantom stock is a special type of stock option scheme that protects the holder against any depreciation in the value of stocks.

Advantages of Stock Plan:

  1. Employee remains loyal and committed to the company.
  2. Develops long-term relations between employer and employee. The employees feel that they are owners of the company and not just paid servants.
  3. Develops teamwork among employees.
  4. Reduces employee turnover.
  5. The companies are able to attract and retain employees.
  6. The scheme links compensation to performance.


  1. The scheme can be implemented only by profit-making companies.
  2. Falling share prices lead to losses.
  3. Employees are forced to continue employment with the company for availing the scheme.

Gain Sharing

Gain Sharing aims at increasing productivity or decreasing labour cost and sharing the gains with employees. When productivity exceeds the baseline, an agreed savings is shared with employees. Gain sharing plan increases co-operation and understanding among workers and teams and they work for achievement of common goals. Example: Scanlon plan aims at cost cutting and increasing efficiency of operations and sharing the gains with employees. It also includes suggestion scheme for cost-cutting.

Earning at Risk plan

Earnings-at-risk (EAR) incentive plans are designed to enhance performance, in part, by creating base wage dissatisfaction that, in turn, triggers greater effort directed toward performance behaviors rewarded with incentive pay. However, employee disatisfaction with EAR plans in general and base wages in particular may also produce unintended consequences that counteract any benefits these plans produce.

Managers who decide to adopt an EAR plan should be aware of the negative reactions employees may have to these plans, the level of personal control employees actually have over targeted performance behaviors and the need for a level playing field that does not put newer employees at a disadvantage.