This document discusses different types of bonus programs, including current profit sharing and gain sharing. Current profit sharing involves setting aside a predetermined percentage of payroll as a bonus based on company or line of business profits. Gain sharing aims to improve performance by motivating employees to work smarter as a team and share financially in gains. The document also covers employee stock options, which give employees incentives to boost stock price by allowing them to purchase company shares at a fixed exercise price.

1. Types of Bonus
Compensation Management

2. Prepared By
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Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com

3. Current Profit Sharing
Compensation Management

4. Current Profit Sharing
• One very basic type of
bonus program is current
profit sharing. A company
sets aside a predetermined
amount, usually between
2.5 and 7.5 percent of
payroll but sometimes as
high as 15 percent, as a
bonus on top of base
salary.

5. Current Profit Sharing
• Such bonuses depend on
company profits, either the
entire company's
profitability or from a given
line of business. Sometimes
the bonuses are given across
the board, and sometimes
they are given in larger
percentages of
compensation the more
someone makes.

6. Current Profit Sharing
• Profit sharing refers to various
incentive plans introduced by
businesses that provide direct or
indirect payments to employees
that depend on company's
profitability in addition to
employees' regular salary and
bonuses. In publicly traded
companies these plans typically
amount to allocation of shares to
employees.

7. Current Profit Sharing
• The profit sharing plans are
based on predetermined
economic sharing rules that
define the split of gains
between the company as a
principal and the employee
as an agent

8. Current Profit Sharing
• For example, suppose the
profits are x, which might be
a random variable. Before
knowing the profits, the
principal and agent might
agree on a sharing rule s(x).
Here, the agent will receive
s(x) and the principal will
receive the residual gain x-
s(x).

9. Current Profit Sharing
• The purpose of profit
sharing bonuses is to
encourage employees to
understand how their work
affects the company's
performance and to improve
the company's profitability.

10. Current Profit Sharing
• Learn how your company
makes money and how your
position can help it make
more. The annual report and
other statements will give
you an idea of how the
company is performing.

11. Current Profit Sharing
• It will also make you look
good to your manager if
you show an interest in
the company's
performance.

12. Gain Sharing
Compensation Management

13. Gain Sharing
• Gain sharing is a system of
management used by a
business to increase
profitability by motivating
employees to improve their
performance through
involvement and
participation. As their
performance improves,
employees share financially
in the gain (improvement).

14. Gain Sharing
• Gainsharing’s goal is to
improve performance and
eliminate waste (time,
energy, and materials) by
motivating employees to
work smarter as a team
rather than just working
harder.

15. Gain Sharing
• There are two important
parts of a Gain sharing
system. One is a bonus
calculation. The second is a
structured system for
employee involvement.
Because of these two parts,
Gain sharing is best seen as
an "organizational
development" tool.

16. Gain Sharing
• This type of bonus program
is most common in
manufacturing plants and is
designed to reward
productivity and improved
product quality.

17. Gain Sharing
• Gain sharing works best when
employees become responsible
for production quantity and
quality and are encouraged to
improve the way the product is
made. This program reflects a
philosophy that employees
know their job best.

18. Gain Sharing
• Gain sharing programs pay
out bonuses for statistical
improvements in production
and quality on a quarterly or
sometimes monthly basis,
providing a sense of
excitement for participants.

19. Gain Sharing
• These programs are often
very successful, transforming
the manufacturing plant into
a center of employee
commitment.

20. Employee Stock Option
Compensation Management

21. Employee Stock Option
• An employee stock
option (ESO) is
commonly viewed as a
complex call option on
the common stock of a
company, granted by the
company to an employee
as part of the employee's
remuneration package

22. Employee Stock Option
• Many companies use
employee stock options
plans to retain and attract
employees, the objective
being to give employees an
incentive to behave in ways
that will boost the
company's stock price.

23. Employee Stock Option
• If the company's stock
market price rises above the
call price, the employee
could exercise the option,
pay the exercise price and
would be issued with
ordinary shares in the
company,

24. Employee Stock Option
• The employee would
experience a direct financial
benefit of the difference
between the market and the
exercise prices.

25. Employee Stock Option
• If the market price falls
below the stock exercise
price at the time near
expiration, the employee is
not obligated to exercise the
option, in which case the
option will lapse.

26. Employee Stock Option
• Another substantial reason
that companies issue
employee stock options as
compensation is to preserve
and generate cash flow.

27. Employee Stock Option
• The cash flow comes when
the company issues new
shares and receives the
exercise price and receives a
tax deduction equal to the
"intrinsic value" of the ESOs
when exercised.

28. Employee Stock Option
• Employee stock options are
mostly offered to
management as part of their
executive compensation
package. They may also be
offered to non-executive
level staff, especially by
businesses that are not yet
profitable, insofar as they
may have few other means
of compensation

29. Employee Stock Option
• Employee stock options are
mostly offered to
management as part of their
executive compensation
package. They may also be
offered to non-executive
level staff, especially by
businesses that are not yet
profitable, insofar as they
may have few other means
of compensation