Chapter 11: Designing

Performance Pay Plans

Learning Outcomes
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:

 Identify the main types of gain-sharing plans and key issues in their
design.
 Identify the main types of goal-sharing plans and key issues in their
design.
 Identify the main types of profit-sharing plans and key issues in their
design.
 Identify the main types of employee stock plans and key issues in their
design.
 Discuss the considerations in designing a nonmonetary rewards
program.

WHO WANTS TO BE A MILLIONAIRE?

In the 1980s, a young, aggressive software company wanted a tool to help it attract and
motivate young, dedicated employees who would be willing to stick with the firm and do
whatever it took to make the company successful. As part of its compensation strategy,
the firm offered generous employee share plans, where employees would acquire
significant holdings in the company. At the time, no one knew whether this would end up
being a bonanza or a bust for the employees. In many cases like this, the company
doesn’t make it and the shares become virtually worthless.

In this case, the story had a very happy ending for the employees. The company was
Microsoft, and by 1996 virtually all the company’s original employees (and many of the
later ones) had become millionaires. By 2015, it was estimated that Microsoft had
created three billionaires and more than 12 000 millionaires through its employee share
plans! Ironically, now that they are independently wealthy, many of these employees
have left Microsoft to pursue a variety of life goals. Former employees now have very
diverse careers, from starting independent businesses, to researching psychedelic
drugs. Some previous employees own sports teams, while others pursued careers in
photography, writing, making music, cooking, and philanthropy. Of the 11 original
employees, Bill Gates was the only individual remained working for Microsoft. Bill sat on
the board of directors and acted as a technical advisor to the current CEO, up until
March 2020, when he decided to step down. However, many other long-term employees
have stayed because Microsoft pays a lot of attention to providing jobs and a work
environment that are intrinsically motivating.

Google has a similar story. Two Stanford PhD students that devised the concept of the
search engine for a research project in 1996 created Google. The company was
established in 1998 and became public in 2004. Once the company became public,
experts estimate that approximately 900 employees turned into immediate millionaires.
One of the multi-millionaires includes Bonnie Brown, who joined Google in 1999 as a
part-time masseuse for the company’s 40 employees. The company had offered her
US$450 a week and Google stock options. Bonnie didn’t think the shares would ever
amount to much. She is now retired, has a personal masseuse and pilates instructor,
and travels the world on money earned through Google.

Though both Microsoft and Google employees have had substantial success with
employee share plans, current employees could fall victim to circumstance if they rely
too heavily on stock options as their main source of income. Amid the COVID-19 panic in
March 2020 (when this chapter was written), Microsoft’s stock dropped more than 13
percent in one week, and Bill Gates lost US$6.6 billion of his net worth. The five most
valuable American companies by market cap (Microsoft, Google-parent Alphabet, Apple,
Amazon, and Facebook) lost a combined amount of US$238 billion in value in February
2020 as a result of a stock market plunge amid COVID-19 concerns. Yet experts remain
assured that a recession will not significantly impact Microsoft or Google. Though both
companies are well known for their influential cultures, only time will tell if current events
will have an enduring impact on both employee stock options and, subsequently,
company culture.
 Mi
crosoft has created thousands of millionaires among its employees. ©
[Link]/NicolasMcComber

Sources: Julie Bick, “Microsoft Millionaires Branch Out,” Star Phoenix [Saskatoon], June
3, 2003, C10; Matt Weinberger, “Microsoft Millionaires Unleashed,” Business Insider,
August 8, 2015; Matt Weinberger, “The Weird and Wild Ways Microsoft’s First
Employees Spent the Millions They Made,” Business Insider, December 29, 2017; Matt
Weinberger, “Where are They Now? What Happened to the People in Microsoft’s Iconic
1978 Company Photo,” Business Insider, January 26, 2019; Will Jeakle, “In Praise of Bill
Gates: Entrepreneur, Normal Guy, Potential Savior of the World,” Forbes, March 19,
2020; Stefanie Olsen, “Life After Google, With Millions” CNET, January 23, 2008; Katie
Hafner, “Google Options Make Masseuse a Multimillionaire,” The New York Times,
November 12, 2017; Jessica Bursztynsky, “Coronavirus Plunge Wipes More Than $230
Billion from Big Tech Stocks,” CNBC, February 24, 2020.

INTRODUCTION TO TYPES OF PLANS

AND DESIGN ISSUES
Suppose that, based on all the considerations in the first half of this book, you have
decided that an employee stock plan should be part of your compensation strategy. As
you will see later in this chapter, not every employee stock plan works out as well as
Microsoft’s did. How can we design an employee stock plan that benefits both the
company and its employees? What are the key issues to consider in designing a
successful plan? Employee stock ownership may be a good fit for your firm, but many
design issues will need to be dealt with effectively before such a plan can be launched,
and you need to understand them.

This chapter addresses these design issues, not only for employee stock plans but also
for three other important types of performance pay plans. In previous chapters we
discussed individual employee performance plans. This chapter focuses on plans geared
to the performance of work groups—notably gain-sharing and goal-sharing plans—and
on plans geared to the performance of the organization as a whole—notably profit-
sharing and employee stock plans. We end this chapter with a discussion of employee
recognition programs that don’t involve cash payments. As you understand by now,
money is not the only valued reward an organization can offer!

GAIN-SHARING PLANS
We’ll start with gain-sharing plans. As you will recall, the defining feature of gain-sharing
plans is that whenever employees in a particular work group are able to reduce costs or
increase productivity, a portion of the resulting gains are shared in a systematic way
among all the members of the work group. Cost savings can be brought about in a
variety of ways, such as through improved quality, decreased waste, improved methods
of working, and, of course, increased output per unit of labour.

Types of Gain-Sharing Plans

There are four main types of gain-sharing plans: the Scanlon plan, the Rucker plan,
Improshare, and the family of measures plan. And there are countless permutations of
these.

The Scanlon Plan

The Scanlon plan was developed by Joseph Scanlon, a United Steelworkers local
president, at a financially troubled steel mill during the Great Depression. In a Scanlon
plan, the organization first computes a “normal” labour cost, based on past experience
and expressed as a percentage of the sales value of production. For example, labour
costs may be 50 percent of the sales value of production. If workers lower this cost to 47
percent, they share this productivity gain (three percent of sales value) with the company
according to a prearranged formula. For Scanlon plans, the share traditionally has been
25 percent for the company and 75 percent for employees, based on the notion that the
workers are primarily responsible for the productivity gain; however, many gain-sharing
plans use a 50/50 share.

The Scanlon plan is much more than a financial incentive plan. According to proponents,
the key to its success is the development of a cooperative relationship among workers,
union, and management, along with the establishment of a process through which
workers can contribute to problem solving. Within each work unit, gain-sharing
committees composed of management and worker representatives solicit and examine
employees’ suggestions for improvements and recommend either approval or rejection.
If the proposal is outside the department’s jurisdiction or involves large expenditures for
implementation, the committee passes it on to a plant-wide committee, where top
management and union officials (if the firm is unionized) discuss it. Typically, all
members of the gain-sharing plan share in savings from any resulting improvements.

The Scanlon plan has been modified over time. A major modification has been the
inclusion of additional costs besides labour.1There are two reasons for this change. First,
many possible cost savings do not show up in labour costs, such as reductions in raw
materials waste. Second, because it is usually possible to decrease labour costs by
increasing other costs, a singular focus on reducing labour costs could spur a rise in
other costs. For example, a worker may scrap slightly defective raw material instead of
trying to work with it because using the poorer quality raw material would slow production
and increase labour costs. As another example, a worker may discard tools that become
somewhat dull because they slow down the work, even though replacements may be
expensive. With the “multicost” approach, the share for employees is usually lower,
perhaps by 50 percent, because potential savings are much higher with a broader cost
base.

The Rucker Plan

Another type of gain-sharing plan was developed in the 1930s by Alan Rucker, who
modified the Scanlon plan in a small but very significant way by expressing labour costs
as a percentage of value added (sales value of production less purchased inputs), rather
than the sales value of production. The effect is that employees benefit from reductions
in raw materials or any other purchased inputs and are therefore motivated to find ways
to reduce these costs; like the Scanlon plan, the Rucker plan typically has a worker
participation component.

Improshare

A third type of gain-sharing plan, known as Improshare, was developed by industrial

engineer Mitchell Fein in the 1970s.2This plan does not use dollar values of production
but rather labour hours per unit of output, usually based on the previous year’s output.
The plan also takes into account indirect labour hours and includes them in the base
productivity factor. When productivity exceeds the base productivity factor, a bonus is
paid, usually 50 percent of the labour savings.
A disadvantage of Improshare is that it does not take other cost savings into account.
Also, it does not make employee involvement integral to the system (something that
classical firms might in fact regard as an advantage). Most experts believe that the
participation element is vital to successful gain sharing; research has shown, however,
that gain sharing can succeed even without mechanisms for employee participation.3

Family of Measures Plan

A family of measures plan describes any gain-sharing formula that uses multiple,
independent measures. A gain (or loss) is calculated for each measure separately; the
results are then aggregated to determine the size of the bonus pool.4 The key attractions
of this method are flexibility and focus. Flexibility comes from the ability to include
performance measures that are especially important to the success of the business.
Focus comes from the ability to specify the types of performance that lead to bonus
payouts.

For example, the performance measures might include not only labour and materials
efficiency but also production schedule attainment, quality levels, customer satisfaction
measures, and even accident rates. Some of these additional measures can be based
on historical records; others can be based on the achievement of targets or goals set by
management. In addition, some measures (known as “modifiers”) may subtract from
rather than add to the bonus. For example, some firms subtract from labour savings if
there are excessive accident levels. The logic here is that labour productivity should not
increase at the expense of safety. Compensation Today 11.1 provides an example of a
longstanding family of measures approach used at a service enterprise.

COMPENSATION TODAY 11.1

A GAIN-SHARING PLAN FOR NEUROSURGEONS

Gain sharing is a practice customarily frowned upon within the medical community.
Nonetheless, somehow a group of neurosurgeons in the United States who conduct
spinal fusion surgery has been approved to take part in a gain-sharing program. The
gain-sharing plan is a three-year program designed to reward neurosurgeons with as
much as 50 percent of the cost savings that have been accumulated from the
neurosurgeons’ use of specific products during surgery.

To determine the extent of the cost-savings, a Program Administrator thoroughly

reviewed supply costs, quality of care, and application nationally, and then matched the
results with the hospital’s archival information. Then, both the Program Administrator and
a committee of neurosurgeons pinpointed 24 potential cost-saving measures that can be
classified into two groups. The first cost-saving category involves reducing the use of
 Bone Morphogenetic Protein to use in under four percent of surgeries (a product used in
spinal fusion surgeries that is expensive). The second cost-saving category is using
approved products (dependant on efficacy and cost).

To determine the cost-saving accomplished in a given year, the committee reviews the
costs from the spinal surgeries that year compared to the expenses accrued from the
previous year. The number of surgeries exceeding the amount performed in the last year
is not considered in the savings calculation. Once the amount of savings is calculated,
the hospital pays the group of neurosurgeons 50 percent of the savings on a per-capita
basis after deducting Program Administrator costs and other administrative costs. The
neurosurgeons’ payout cannot exceed the potential savings first predicted by the
Program Administrator.

Safeguards are put in place for consistent quality of care. Monitoring and reporting are
significant components. Neurosurgeons cannot select which patients are part of the
review. The selection of patients must be historically consistent. Patients are allowed to
review the arrangement and ask the neurosurgeons how they enacted cost-saving
measures. The incentive is collective to ensure that no individual neurosurgeon would
attempt to cut costs for personal gain. Finally, in another strategy to ensure
neurosurgeons do not cut corners, the Program Administrator determined the anticipated
cost savings ahead of time.

Source: Ryan Cuthbertson and Nili S. Yoiln, “OIG Reaffirms Permissible

Arrangements,” Mintz, January 10, 2018.

Family of measures plans have some disadvantages compared to the other types of
plans. A major one is that some of the payouts are not based on calculated cost savings
but rather on the achievement of certain goals. Thus, the payout for achieving these
goals may bear little relation to actual cost savings because these cost savings are often
hard to quantify. Consequently, employees may see the payouts as arbitrary (because
there is no solid basis for them) and the goals as unrealistic. Where goals are seen as
unrealistic, little effort will be made to attain them.

Issues in Designing Gain-Sharing Plans

There are key issues to consider when establishing gain-sharing plans.

1. Defining the group or work unit to be included in the plan.

2. Establishing the bonus formula.
3. Defining the baseline against which to measure improvement.
4. Deciding on the share between the company and the employees.
5. Deciding on the split among employees.
6. Deciding on the frequency of payout.
7. Developing procedures for communicating results.
8. Deciding whether and how to incorporate employee participation.
If each of these issues are not addressed appropriately, it could cause the plan to fail.

Defining the Group

Defining the group or unit for a particular gain-sharing plan is not as easy as it sounds. In
general, all employees who are in a position to significantly affect the results of the plan
should be included.

For example, a company that distributed building materials (such as drywall) wanted to
improve the productivity of its warehousing and delivery operations. It wanted to improve
the efficiency of delivery and reduce wastage resulting from improperly loaded or
carelessly handled material. It had warehouses in various cities across western Canada.
At first, the company included just the warehouse staff and delivery drivers at each
location in gain sharing. Thus, one gain-sharing group was the Winnipeg warehouse and
delivery staff, another was the Regina warehouse and delivery staff, and so on.

In the beginning, the office staff at each location were not included in the gain-sharing
groups. However, the company soon realized that these people had a significant impact
on warehouse and delivery efficiency, depending on how quickly they responded to
customers and passed the information on to the warehouse, whether they were precise
about delivery locations, and how effectively they sorted out problems. Moreover, leaving
office employees out caused them to think that the company did not consider them
important. As a result, the plan was revised to include them in the gain-sharing groups,
along with the warehouse managers, who had also been left out on the argument that
they received other types of bonuses.

Establishing the Bonus Formula

Because each gain-sharing program uses different criteria to establish its bonus formula,
a company must determine which criteria are appropriate for its situation. In general, the
simpler the formula, the better. But at the same time, the plan must capture all the
factors that affect performance. Thus, most plans typically include a number of
performance measures, along with some modifiers to constrain undesirable behaviour.
For example, the performance measure for a mining team might be tonnes produced per
person-hour. To avoid abuse of equipment (e.g., the changing of cutting bits more often
than necessary to maximize production), any excess equipment replacement costs could
be factored into the formula. And to avoid unsafe practices, a modifier stipulating no
bonus for periods in which lost-time accidents occurred could be included.
Defining the Baseline

Vital to a gain-sharing plan is a historical baseline against which to compare productivity

to determine whether real productivity gains have actually taken place. Typically, a
company can use its past two to three years of productivity results and compute an
average. However, this procedure is valid only when the baseline over this period does
not show a markedly upward or downward trend. In some cases, stable historical
baselines don’t exist, especially if the product/service mix is continually changing, if raw
materials are improving (or declining) in quality or ease of use, or if the
production/service technology frequently changes. If no valid historical benchmark can
be set, then a gain-sharing plan is not viable and some other option (such as goal
sharing) needs to be considered.

A key question is whether to change the baseline over time. A baseline that stays
constant is known as a “fixed baseline,” while baselines that change are known as
“ratcheting” or “rolling” baselines. A ratcheting baseline goes up each year there is a
productivity gain, so that last year’s productivity becomes the new baseline. A rolling
baseline uses a fixed period (say, a three-year period), dropping the oldest year off and
adding the newest one. The result is similar to a ratcheting baseline, but it develops
more slowly.

Management’s rationale for ratcheting or rolling baselines is to keep pushing productivity

up. However, employees may find that this kind of baseline just means working harder to
maintain the same reward level. Moreover, depending on the measure, at some point it
becomes very unrealistic to push the baseline up any further, unless the goal is to wipe
out the gain-sharing plan without formally ending it. For example, if the measure is a
reduction in defect rates, what happens when defect rates approach zero? Overall,
ratcheting or rolling baselines are likely to be demotivational if employees start to see
them as causing “long-term pain” for a “short-term gain.”

This is not to say that baselines should never change. Changing them is reasonable if
new capital equipment speeds up the production process without any increased worker
effort, or if products are redesigned for easier production. However, in these cases,
management must resist the temptation to take advantage of these changes to unduly
raise the baseline. If workers are to have any trust in the plan, reasons for changes to
the baseline must be clearly explained to them.

Deciding the Share

The “share” is the formula for dividing the bonus pool generated by productivity gains
between the employees and the company. Typically, the employee share ranges from 25
percent to 50 percent, although it can range as high as 75 percent in Scanlon plans,
which defines productivity gains on a relatively small base.5

Three criteria must be considered when setting the share. First, the broader the bonus
formula, the lower the share because there are more opportunities for productivity gains
or cost savings with a broader formula. Second, the higher the capital intensity, the lower
the share. Because there are relatively fewer employees in a capital-intensive firm, a
lower share can still produce high bonuses for individual employees. Third, the more
demanding the baseline (i.e., the greater the extent to which it increases), the higher the
share needs to be to compensate for the increasing difficulty of achieving productivity
gains.

Deciding the Split

How should the bonus pool be split across the eligible employees? Should everyone
receive an equal share? That sounds fair—but is it? What about employees who have
been employed by the firm for only a few days during the bonus period? What about
employees who are only part-time? What about employees who have performed
exceptionally well during the bonus period? What about senior employees—do they
deserve more of the pool?

The answers to these questions depend on the organization’s goals for the gain-sharing
plan. Some firms distribute the bonus according to the salary levels of employees, with
those who have higher salaries receiving a greater share of the gain-sharing bonus,
based on the assumption that the more highly paid employees have probably contributed
more to the cost reductions. A major advantage of salary-based allocation is that it
maintains the same proportion of goal-sharing compensation in the compensation mix
for all employees.

However, the bonus allocation method that is most in keeping with the underlying
philosophy of gain sharing is equal allocation across employees after adjusting for time
worked during the bonus period. Gain sharing is intended to create cooperation and
teamwork, and equality is an underlying condition of both. If singling out individuals for
special treatment is necessary, companies should use other elements of the
compensation system, rather than the gain-sharing plan.

Deciding the Payout Frequency

On what period should the bonus calculations be based? Both technical and behavioural
issues must be considered here. For example, if productivity results fluctuate widely on a
weekly, monthly, or seasonal basis, longer payout periods will be required. But from a
behavioural point of view, for maximum motivation, the receipt of rewards should closely
follow the event that triggers the rewards. Also, the size of the reward should be at least
enough to provide a “just noticeable difference.” This suggests longer bonus periods,
which would also reduce administrative costs. Overall, quarterly bonuses are often the
best compromise.

Communication
A compensation system will not have any impact if employees do not understand how it
works and how their behaviour relates to rewards. Employees need to see whether they
are making progress toward meeting the bonus criteria that have been set out, so
frequent feedback about productivity results and cost savings is essential. However,
communication does not happen without effort and planning, so procedures for
communicating this information need to be planned and implemented carefully.

Participatory Mechanisms

Some gain-sharing plans, such as Scanlon and Rucker, specifically incorporate a

mechanism through which employees can participate in making productivity
improvements. Participation is often achieved through an employee–management gain-
sharing committee, which meets on a regular basis to solicit employee suggestions and
feedback. Other plans, such as Improshare, carry no such requirements.

Research shows that Improshare systems can be effective even though they lack a
participative element.6 Research on group pay in general (including various types of
group pay) indicates that such plans can be very successful in the absence of
participatory mechanisms, although their success increases if they are accompanied by
an employee suggestion program, which most gain-sharing plans include.7It is
interesting, though, that the favourable results were not found in firms that pursued an
innovator business strategy, only in firms that did not. Group pay had no impact—
positive or negative—in innovator firms. This suggests that conditions in innovator firms
are too unstable to provide the stable historical baselines necessary for successful gain
sharing.

Considerable research has been conducted on the conditions necessary for gain-sharing
plans to succeed.8 First, employees must regard the gain-sharing system as fair and
equitable in terms of both procedural and distributive justice. Employee participation in
the development of the gain-sharing system can help achieve this goal. Because an
organization needs to adjust these plans over time, it also needs a certain level of trust
between management and employees, as well as a history of job security. Employees
must have some assurance that they will not “work themselves out of a job.” For
example, when John Deere Corporation abandoned individual production bonuses for its
employees and moved to gain sharing (see Compensation Today 11.2), it guaranteed
that the only jobs that could be eliminated if productivity increased were those of retiring
employees.

COMPENSATION TODAY 11.2

NOTHING RUNS LIKE A DEERE! ESPECIALLY A DEERE WITH GAIN SHARING!
In the 1980s, John Deere Corporation was in trouble. The long-time maker of agricultural
equipment, including tractors and combines—as well as construction equipment and
consumer products like riding lawnmowers—found sales in a deep slump due to
economic circumstances. To survive, management had to come up with some way to
increase productivity and cut costs. Previously, to motivate production employees, they
had relied on a system of base pay plus an individual incentive based on whether the
employee exceeded the production standard for his or her job.

However, while this system was believed to be effective in eliciting individual effort from
the production employees, the company felt that it didn’t promote teamwork or innovative
production ideas. They saw three main problems with the current system. First, individual
employees were not willing to spend any time training or helping new employees
because this would cut into their own productivity. Second, the system led employees to
conceal any methods for faster production from the industrial engineers, as employees
were concerned that revealing these methods would result in a higher production
standard, and less bonus for them (which is actually what would have happened). Third,
the standard hours plan was very difficult and expensive to maintain—to maintain and
update the production standards required more than 600 industrial engineers at a cost of
over $30 million per year.

The company felt that replacing the standard hours system with gain sharing might
alleviate these problems, and sought union approval to do so. After extensive
consultation with the United Auto Workers, and having made a pledge that no existing
employees would be laid off as a result of this change (the only jobs that could be
eliminated were those of retiring employees), the union approved the change. First, all
manufacturing employees were grouped into work teams, each of which was responsible
for a particular part of the production process. This resulted in 240 work teams. Rather
than individual performance, team performance was measured and rewarded. In addition
to their hourly pay, each team was rewarded according to whether they had cut labour
costs relative to standard costs, which were themselves based on historical costs. Team
members would share equally whatever gain-sharing bonus the team had earned. John
Deere has since found this system—which is really based on a transition from classical
to high-involvement managerial strategy—to have substantially improved productivity not
only in America but as well in the United Kingdom, Mexico, Uganda, Honduras, and
Zambia.

In recent times, John Deere has faced obstacles and revenue loss. Most recently, in
2019, the Institute for Supply Management stated that the United States’ manufacturing
sector was in an economic recession. The trade war between the United States and
China significantly impacted the United States farm produce, where China imported
$19.5 billion of American farm produce in 2017, down to $9.1 billion in 2019. Not to
mention, 2019 year had a record-setting wet spring that prohibited crop yields, and then
a hot and dry summer that lessened corn and soybean yields. With fewer exports,
American farmers bought less machinery.
One of the disadvantages of the gain-sharing plan is that it does not consider the
changes in the company’s prices, revenue volume, client loyalty, and any other issues
the organization may be facing. Paying out necessary gain-sharing amounts may not be
sustainable. In 2015, John Deere laid off a thousand employees. As of March 2020, the
company laid off 468 employees in the United States in less than a year. The number of
layoffs in the United States will likely increase, and layoffs will occur internationally in
2020 as well. If the situation becomes dire, the company may have to revisit its
compensation strategy. Hopefully, current events do not hit employees like a Deere in
the headlights.

Sources: Geoffrey B. Sprinkle and Michael G. Williamson, “The Evolution from Taylorism
to Employee Gainsharing: A Case Study Examining John Deere’s Continuous
Improvement Pay Plan,” Issues in Accounting Education 19, no. 4 (2004): 487–503;
Alexander C. Gardner, “Goal Setting and Gainsharing: The Evidence on
Effectiveness,” Compensation & Benefits Review 43, no. 4 (2011): 236–44; Robert
Connelly, “In the Last Year, Deere & Co. Has Laid Off 468 Employees. 340 Worked in
Iowa,” Quad-City Times, March 10, 2020; George Gallanis, “John Deere Announces
Layoffs at Plants in Illinois and Iowa,” World Socialist Web Site, October 4, 2019.

GOAL-SHARING PLANS
Goal sharing gained popularity in the 1990s. However, like gain sharing and other group
pay plans, it appears to have lost popularity over time. This is a bit surprising given that
research shows that group-based plans can dramatically improve company profitability
when adopted by firms that are not pursuing an innovator strategy.9 Moreover, even in
firms that do pursue an innovator strategy, these plans broke even on average, so there
doesn’t seem to be much to lose in trying them, especially when conditions are right.

The essence of goal sharing is that work groups or teams receive a bonus when
specified performance goals are met. Goal-sharing plans differ from gain-sharing plans
in several fundamental ways. In gain sharing, cost savings are quantified and then
shared between the company and the group, whereas under goal sharing there is
typically no systematic link between performance improvements and the goal-sharing
bonus pool. How, for example, do you place a monetary value on achieving the goal of
increased customer satisfaction?

There are no set goals with gain sharing other than to improve as much as possible
relative to the historical baseline. In contrast, under goal sharing, goals on one or more
performance indicators are set for each group or team, to be met within a specified time
period, and a bonus is paid to all team members if the goal is achieved.
 In gain sharing, there is an expectation of continuity—the gain-sharing system will not be
changed arbitrarily, because procedures for calculating and sharing gains are so well
spelled out. While goal-sharing plans are more flexible, the flip side of that is that
continuity of goal-sharing plans is less assured than with gain sharing.

Finally, in most gain-sharing plans, there is usually an explicit expectation of employee

involvement in suggesting ideas for productivity gains. Under goal sharing, employee
participation is not necessarily a component, although it can be.

Types of Goal-Sharing Plans

Goal-sharing plans have not really evolved to the point where distinct types can be
identified. However, one important distinction is whether they are single-goal plans,
multigoal plans, or financially funded plans. Single-goal plans are the simplest and focus
attention on one key goal, such as customer satisfaction. These plans may cause other
important behaviours to be neglected,10 so most firms typically use multigoal plans to
better cover the range of desired behaviour.11

Financially funded plans combine two sets of criteria. The total amount of the goal-
sharing bonus available is typically based on some indicator such as company profit,
while the actual amount of the payout is based on the achievement of specified goals.
This combination of criteria has the benefit of not paying out goal-sharing bonuses when
the company is not profitable, but it also makes the performance-reward contingency
less certain, which generally diminishes employees’ motivation to meet goals.

Issues in Designing Goal-Sharing Plans

Many issues need to be dealt with when designing a goal-sharing plan.

1. Defining the group to which goal sharing applies.

2. Deciding on the nature of the goals to be sought.
3. Determining levels and time frames for goal achievement.
4. Establishing bonus amounts.
5. Deciding on the split of the bonus among employees.
The first issue is defining the group to which a given goal-sharing plan will apply. In
general, the smaller the group, the stronger the motivation; however, the group must
include all employees who can play a significant role in goal achievement.

A critical variable is the nature of the goals to be set. They must be important to the
organization and controllable by the work group, and they encompass the full range of
desired behaviour. Care must be taken to ensure that the goals do not conflict. For
example, Continental Airlines (that later merged with United Airlines) was suffering from
a very poor on-time performance record. So the company established a goal-sharing
plan in which all employees who affected on-time performance, such as baggage
handlers, would receive a bonus if on-time performance improved to the point that
Continental was among the five top airlines in this performance category. The plan
worked: on-time performance improved and bonuses were paid out. Unfortunately, at the
same time, customer complaints increased, as passenger baggage was often left behind
in order to get flights out on time.12

Once the goals to be rewarded have been identified, the organization needs to
determine the levels of achievement necessary to trigger a bonus payout. This is
probably the single most important factor in the success of a goal-sharing plan. Goals
that are seen as too difficult do not motivate behaviour. Goals that are too easy also do
not motivate; such goals also carry the additional penalty of paying out bonuses for no
real performance gain and may cause employees to ease off once the goal is achieved.
When there is a single goal achievement level, there is no employee motivation to
surpass the target goal; in fact, it may well be seen as undesirable to surpass the goal if
so doing might result in a higher target goal the following year.

Many firms have now established several levels of achievement for each goal. At one
firm, a goal level that exceeds current performance, but not by much, is called the
“standard plus” goal; the next level is called the “goal level,” which is viewed as realistic
but not a sure thing; and the highest level, which employees have less than a 50 percent
likelihood of achieving, is called the “goal plus” level. The “goal plus” level is an example
of what is commonly known as a “stretch goal.” Of course, bonus amounts increase
substantially for each goal level that is met.

To establish goal levels to which employees will commit, many organizations involve
employees in the goal-setting process. Research has shown that employees are more
motivated to attempt goals they have played a role in developing.13

Goals also need to be bounded by some time period. Within what time frame does the
goal need to be accomplished? For most goals, a year would seem a reasonable time
period. At the end of the year, new goals can be established, depending on whether or
not the goal was met.

Once an organization has established the target goal levels, it must set the dollar amount
of bonus for each level of accomplishment. Sometimes it can find a cost basis for so
doing. For example, if a company knows how much it costs to correct a particular type of
error, it can use this number to calculate a reasonable bonus for achieving a particular
reduction in the error rate. But in other cases, there may be no good basis for calculating
the value of goal achievement—for example, the value of improved “on-time
performance.”

Another key issue is the basis for allocating the goal-sharing bonus among employees.
The basis can be salary, seniority, individual performance, some combination of these,
or equal distribution. Equal distribution is the most egalitarian, but is it really fair to more
senior employees, who may feel that they have contributed more to company success
and who have shown long-term commitment to the firm? The advantage of salary-based
allocation is that it maintains the same proportion of goal-sharing compensation in the
compensation mix for all employees. One advantage of allocating the bonus on
individual performance is that it addresses the free-riding problem. But the challenge
here is to create an individual performance appraisal system that employees accept as
fair. Finally, even where equal allocation is used, adjustments typically have to be made
based on the number of days or hours actually worked during the period in which goal
accomplishment took place.

PROFIT-SHARING PLANS
Research by one of the authors indicates that about one-quarter of medium to large
Canadian firms use broad-based profit sharing. Profit-sharing plans are just as likely to
be found in publicly traded as in privately held corporations. Studies have found that
profit sharing is applicable to a wide variety of industries; the only commonality among
profit-sharing firms is that they tend to be high-involvement organizations.14

Types of Profit-Sharing Plans

As discussed in Chapter 5, there are three main types of profit-sharing plans: current
distribution, deferred profit sharing, and combination. Research indicates that the
majority of Canadian profit-sharing plans are current distribution (cash-based) plans and
that most of the remainder are deferred plans. Alternatively, the majority of American
profit-sharing plans are deferred plans. However, some firms may use a combination of
cash and deferred, or pay the bonus in company stock.15

Establishing a current distribution plan does not require any approvals by government,
unless the firm wants to register it as an employee profit-sharing plan (EPSP) under the
federal Income Tax Act. The EPSP is not a tax-deferred plan, and these plans are really
a type of unsheltered company-supported savings/investment plan. Their main purpose
is to provide a vehicle for accumulating savings after the tax-deferred approaches have
been exhausted. Registered EPSPs are rarely used because there are no real
advantages to registering them with the federal government, and current distribution
plans can be set up without government registration.

Because the deferred profit-sharing plan (DPSP) is a tax-deferred plan, registration with
the federal government is required. A DPSP trust is set up, and both the employer
contributions and the annual earnings of the trust are exempt from taxation until the
employee actually cashes in the plan, usually at termination or retirement. Because of
this feature, DPSPs are often used as a form of pension plan, especially in small- to
medium-sized companies where no other pension plan exists. The maximum tax
deduction for the DPSP is tied to the unused portion of the employee’s registered
retirement savings plan (RRSP) contribution. The “Top Hat” plans (those in which only
senior management is eligible) are not eligible for registration as a DPSP, as DPSPs
require wide employee eligibility.

Another taxation feature makes the DPSP even more attractive, if shares (rather than
cash) are deposited in the trust. Instead of being taxed on the full market value of the
shares at the time of withdrawal from the DPSP, the employee is taxed on “employment
income” only on the original value of the shares when they were placed in the DPSP
trust on behalf of the employee. When the shares are sold, the difference between the
original value and the selling price is considered a capital gain rather than employment
income. (Note that only publicly traded shares—including those of the employer—are
eligible for purchase by a DPSP.)

Although there are some tax advantages, there is some risk to the employees, in that
even if their shares have declined in value at the time of sale, they still have to pay
income tax on the original amount of the profit-sharing bonus. However, the decline in
share value is partially offset by the capital loss this creates, which can be used to offset
any capital gains the employee may have.

To provide some idea of the diversity of profit-sharing plans, Compensation Today 11.3
gives examples of profit sharing that have been used at two prominent Canadian
companies.

COMPENSATION TODAY 11.3

PROFIT SHARING AT TWO PROMINENT CANADIAN COMPANIES

A company with one of the longest histories of profit sharing in Canada is ArcelorMittal
Dofasco of Hamilton, Ontario. The only integrated steel company in the world that is not
unionized, the company has always seen profit sharing as a major part of its human
relations managerial philosophy. Their plan was Canada’s first profit-sharing plan, which
started in 1938 as a pension plan and continues as a Deferred Profit Sharing Plan
(DPSP), Defined Contribution Pension Plan (DCPP), and a Supplemental Retirement
Income Plan (SRIP).

ArcelorMittal Dofasco determines the DCPP amount to pay each employee by using a
formula that considers an employee’s age, years of service, and earnings. For those
employees that are eligible for profit-sharing, 50 percent of their DPSP is directed
towards their DCPP payment, and the company pays the remainder of the DCPP
throughout the year to attain the Contribution Target. Employees may choose whether
they would like the remaining 50 percent of the DPSP amount to be placed in their
DCPP account, as in this case, it will be tax-deferred. The employee is encouraged to
choose their investment strategy so it is aligned with their personal goals. However, if the
employee does not make their own decision, their money is invested in a safe default
investment that has typically low long-term returns.

The bonus pool for DPSP is 14 percent of pre-tax profits from operations, and it is
allocated equally to eligible employees on an annual basis. All employees with at least
two years of service are included in the plan. In 2000, the company made headlines
when it split a bonus pool of $53.3 million—the highest payout ever—among employees,
who each received $7906. Almost 15 years after becoming a subsidiary of ArcelorMittal,
the employee profit-sharing plan is still going strong. The company employs around 5000
full-time employees in Canada and ships 4.5 million tons of high-quality steel every year
for use in construction, automotive, tubular, packaging, appliance, and distribution
industries. It won the Canada’s Top 100 Employers 2016 Award and in 2018, the
company was classified as one of the top employers for workers over 40 according to
Mediacorp Canada.

Another company with a long-standing commitment to profit sharing is Canadian Tire.

The founder of the chain, A.J. Billes, always believed in profit sharing in both a
philosophical and a practical way. He believed that it was morally just that employees
receive a portion of the profits they helped generate and that this would create employee
commitment to the firm. The company has always had a profit-sharing plan that applies
to the employees of the parent firm, and it strongly encourages profit sharing at its
independently-owned associate stores and jointly sponsors the program with the
dealers. Most stores see the importance of the plan, as 92 percent of such stores choose
to participate.

The Canadian Tire plan is both a share plan as well as a profit-sharing plan. The
company determines the amount that it will invest in the plan based on a minimum of
one percent of the company’s net profit. At the corporate level, the amount paid is based
on a percentage of the employees’ salary, whereas in a franchise the award is a fixed
dollar amount.

A predetermined base amount is set based on limits determined by the Income Tax Act.
This base amount is placed in a deferred profit-sharing account, which cannot be cashed
out while the employee works for Canadian Tire. From the base amount, 10 percent
must be reinvested into a Canadian Tire share (made up of Class A non-voting shares,
Canadian Tire common shares, and a small cash amount), while 90 percent of the base
amount can be invested in a variety of different options from which employees may
choose. The vesting schedule is 20 percent after the first year and 80 percent after the
second year. If the profits exceed the target level (which they usually do), employees are
paid an excess amount. The excess amount can be paid either through taxable cash,
placing the money back into the plan for tax purposes, a group registered retirement
savings plan or a tax-free savings account.
The company contributed $24.1 million to the plan in 2018 and $25.3 million in 2019.
Employees at the corporate level are typically paid around 10 percent of their annual
earnings. However, amid the COVID-19 pandemic in 2020, Canadian Tire announced
that it would be closing “non-essential retail banners,” including SportChek, Party City,
Mark’s Work Wearhouse, and others. Furthermore, at the Canadian Tire locations, store
hours would be reduced. Profitability in 2020 is likely to be heavily impacted; therefore,
Canadian Tire’s contribution to the profit-sharing plan will likely be lower than in
preceding years.

Arc
elorMittal Dofasco has one of Canada’s oldest profit-sharing plans. Cole
Burston/Bloomberg/Getty Images

Sources: Julie Slack, “‘This is Unbelievable For Me,’ Ben Ciprietti on Japanese
Government Award,” Inside Halton, May 29, 2019; David E. Tyson, HR Manager’s Guide
to Profit Sharing in Canada (Toronto: Thomson Carswell, 2006); Lina Stogiannis, “It’s
February and That Means Retirement Savings May Be Top of Mind,” Arcelor Mittal 8, no.
1 (2016): 9; Ken Kilpatrick and Dawn Walton, “What a Joy to Work for Dofasco,” The
Globe and Mail, February 12, 2000, B1; ArcelorMittal, “Benefits & Pay at ArcelorMittal
Dofasco,” [Link]
locale=en_US; Diane Jermyn, “Canada’s Top 100 Employers Rise to the Top for Their
Focus on Mental Health, Social Impact and Work-Life Balance,” The Globe and Mail,
November 28, 2019; Richard Yerema and Kristina Leung, “Mediacorp Canada Inc. staff
editors, Mediacorp Canada Inc.,” Canada’s Top 100 Employers (2016); “At a
Glance,” ArcelorMittal Dofasco,
 [Link]/who-we-are/at-a-glance/[Link]; “ArcelorMittal
Dofasco,” Forbes, [Link]/companies/arcelormittal-dofasco/#90d6b9533cba,
January 28, 2020; “ArcelorMittal Dofasco Tops List of Leading Employers for Workers
Over 40,” Benefits Canada, November 15, 2017; Marg Bruineman, “How Canadian Tire
Connects Retirement to Profits,” Benefits Canada, April 15, 2016; Marg Bruineman,
“How Canadian Tire Connects Retirement to Profits,” Benefits Canada, April 15, 2016;
Canadian Tire Corporation Limited, “Management’s Discussion and Analysis: Fourth
Quarter and Full-Year 2019,” February 12, 2020; Canadian Tire Corporation Limited,
“Management’s Discussion and Analysis: Fourth Quarter and Full-Year 2019,” February
12, 2020; Barret Wilson, “Breaking: Canadian Tire to Close Some Stores, Reduce
Shopping Hours,” The Post Millennial, March 19, 2020.

Issues in Designing Profit-Sharing Plans

Besides the form of the bonus payout (deferred, cash, stock, or a combination of these),
profit-sharing plans have other design issues, including

 the formula for bonus determination (fixed or discretionary),

 employee eligibility,
 the basis for allocating the profit-sharing bonus across employees,
 payout frequency, and
 communicating financial results and profit sharing.
Formula for Bonus Determination

Under a discretionary approach to bonus determination, management simply looks at the

profitability at the end of the year and decides on an amount. The problem with
discretionary plans is that the link between performance and reward becomes even more
tenuous than otherwise because employees do not really know to what extent (if at all)
better performance will be rewarded. For motivational reasons, fixed formula plans are
strongly recommended. There are many possibilities. Two commonly used profit-sharing
plans are straight profit-sharing plans and hurdle-rate profit sharing plans.

The straight profit-sharing plan is the most commonly used and simplest form of profit-
sharing. A portion of pre-tax profit (say, 10 percent) goes into the profit-sharing bonus
pool at the end of the year. Alternatively, the hurdle-rate profit-sharing plan can be a
threshold (say, a return on investment of five percent), and no profit-sharing bonus is
paid until this threshold is exceeded. The formula may also incorporate a step function,
such that the percentage of profits going to the profit-sharing bonus increases as various
thresholds or “steps” are exceeded. The purpose of the hurdle-rate profit-sharing plan is
gain or profit improvement, and in this respect, it is similar to the gain-sharing plan. The
higher the threshold established, the lower the risk to the organization, though the goal
must still be attainable. If an organization wants to deliver a strong message about the
importance of performance, they may freeze salaries and fund increases through its
hurdle-rate profit-sharing plan, for example, after five percent increase on rate of sales.
Otherwise, if a company pays at or above market in base pay, they may establish a
higher threshold, such as distributing profit-sharing funds after a 10 percent increase on
rate of sales.16

Employee Eligibility

Another key issue is employee eligibility. In general, the more inclusive the better,
although casual and contract employees are often excluded, as are unionized
employees if the union does not agree to profit sharing. In most cases, there is a time
period for eligibility (usually one year). Most firms offer the profit-sharing plan to all full-
time employees. Many firms, such as Canadian Tire17 and Ikea in Canada18 offer the
profit-sharing plan to part-time employees as well, although this is not done in the
majority of companies. Other firms exclude unionized employees or part-time employees
or restrict profit sharing to designated employees. Companies should review human
rights legislation when considering excluding part-time employees. If all the employer’s
part-time employees are female, for example, and therefore only females are not
included in the profit-sharing plan, this exclusion could be considered discriminatory,
even if unintentional.19

Basis for Allocating the Profit-Sharing Bonus

Allocation of the profit-sharing bonus can be based on salary, seniority, individual

performance, some combination of these, or equal distribution. The advantage of salary-
based allocation is that it maintains the same proportion of profit-sharing pay in the
compensation mix for each employee. It also tends to provide a greater reward to those
employees who are more able to influence profits. The advantage of allocating the bonus
on individual performance is that it addresses the free-riding problem. But the key here is
the availability of an individual performance appraisal system that employees accept as
fair. Finally, even where equal allocation is used, adjustments have to be made based on
the number of days or hours actually worked during the year in which the profit-sharing
bonus was earned. Whichever allocation method the firm decides to use, total cash
compensation for each position as compared to market rate should be considered.20

Payout Frequency

Payout frequency is another issue. Results must be based on financial statements,

which suggests that payouts should occur no more often than quarterly. In addition,
where profits fluctuate by season, an annual basis is probably best to smooth out these
fluctuations and to avoid paying profit sharing in an unprofitable year.
Communicating Profit Sharing

As with other performance pay plans, communication is important to the success of profit
sharing. Most profit-sharing firms distribute financial statements and profit-sharing
newsletters on a regular basis, but some firms go beyond this. For example, WestJet
holds a profit-sharing party every six months, at which employees receive their profit-
sharing cheques and are treated to a company celebration.21

Research reveals that besides communications, various other factors exist that
determine the effectiveness of the profit-sharing plan. For example, one study found that
firms that pay above market rate before adopting the profit-sharing plan have higher
success rates with profit sharing.22 Another study found that firms that have open
channels of communication so that employees can share thoughts or concerns
pertaining to their peers’ productivity are most successful with profit-sharing
plans.23 Rather surprisingly, company characteristics (such as company size), plan
characteristics, and firm participatory practices were not found to have an impact on the
effectiveness of the profit sharing plan.24

Research reveals that besides communications, two other factors significantly affect the
success of profit sharing, as perceived by Canadian CEOs.25 CEOs reported better
results in firms that use high-involvement management and that allocate the bonus
according to measures of individual performance. Note, however, that the measure of
success used in this study is the CEO’s perception of success, not financial data, so
these are not definitive results.

Rather surprisingly, none of the other company characteristics or plan characteristics

were very important influences on the results of profit sharing. It follows that profit
sharing can be effective for most types of companies and that various plan designs can
be effective as well. One interesting caveat to this finding, however, is that while there
was no major difference in results between firms that used a fixed percentage for bonus
determination and those that did not (except that industrial relations were more
favourable in firms with a fixed percentage), for those with fixed percentage plans,
success increased with the size of the bonus percentage. Overall, performance of the
plan appears to improve when the bonus percentage exceeds 10 percent of profits.

EMPLOYEE STOCK PLANS

As discussed in Chapter 5, an employee stock plan is any type of plan through which
employees acquire shares in the firm that employs them. In some plans, employees
receive shares at no cost, while in others, employees are given the opportunity to buy
stock on favourable terms. This section describes the three main types of stock plans
(stock bonus, share purchase, stock option), along with related plans that tie employee
rewards to company stock performance but do not actually provide employees with the
opportunity to acquire shares (phantom stock plans), as well as the issues to be
addressed when designing these plans.

We
stJet’s pay systems have turned employees into owners. THE CANADIAN PRESS/Larry
MacDougal
Employee Stock Bonus Plans
The essence of stock bonus plans is that employees receive company stock at no cost
to themselves, through one of several methods. One approach is simply to make stock
grants to employees at periodic intervals, often annually. Another approach is to tie stock
grants to the profit-sharing plan, paying out in company stock instead of paying out in
cash. The employee could then put this stock into a deferred profit-sharing plan, if
desired. In some cases, stock bonuses are tied to certain company or individual
performance criteria. As Compensation Today 11.4 shows, stock bonuses can be linked
to almost any kind of criteria.
Taxation is a major issue with employee stock plans and can be either a huge advantage
(in an up market) or a huge disadvantage (in a down market). Employees who receive
stock bonuses are deemed to have received employment income in the amount of
whatever the value of the stock is when it is vested (which occurs when the employee
receives full legal ownership of the shares), but it is taxed at the capital gains rate (which
is half of the rate that applies to employment income). However, the income tax is not
actually payable until such time as the employee sells the shares or the employer goes
out of business. Any appreciation in share value (the difference between the initial value
of the shares and the actual selling price of the shares, if positive) is taxed at the capital
gains rate (which is half the normal rate that applies to employment income). Things are
very rosy tax-wise for employee-owners in an up market.

COMPENSATION TODAY 11.4

IT PAYS TO BE GREEN AT HUSKY INJECTION MOLDING SYSTEMS

At Husky Injection Molding Systems, based in Bolton, Ontario, founder Robert Schad
believed that capitalism could not survive without environmental protection. He devised a
plan to tie the two concepts together. Under his “GreenShares” program launched in
2000, employees received points that could have been redeemed for company shares
whenever the employees demonstrated community or environmental activism. For
example, an hour of volunteer work in the community was worth one-tenth of a share.
Carpooling for a month got you one share. And if you bought a new car that ran partly on
electricity, natural gas, or fuel cells, you received 100 shares.

Sources: Keith McArthur, “Husky Boss Offers Equity for Activism,” The Globe and Mail,
January 21, 2000. Husky Injection Molding website,
[Link]

Stock bonus plans have experienced a decline in popularity in recent years, starting with
the stock market downturn of 2001, which diminished interest in employee share
ownership, and then due to the financial meltdown of 2008–09, which further reduced
employee interest in share ownership. Of the three major stock plans, broad-based (i.e.,
not confined to just senior executives) employee stock bonus plans are the least
common, with perhaps two percent of medium to large Canadian firms offering such
plans to their employees. (By contrast, these plans are extremely common for
executives.) Unlike other employee stock plans, these plans are equally common in
publicly traded and privately held corporations.

A variation that merges the stock bonus plan with the stock option concept is share
appreciation rights. Employees are first “allocated” a number of shares of company
stock, although they do not actually receive any shares. If these “shares” appreciate
within a fixed time period, employees receive as a bonus the number of actual company
shares that this appreciation can purchase (although in some plans, they can opt to take
the cash). For example, if an employee is “allocated” 1000 company shares and the
share price is $20 at the outset and rises to the value of $25 each by the end of the
specified period, then the employee will receive a bonus of 200 actual company shares
(the $5000 appreciation will buy 200 shares at $25 each), at no cost to the employee.

However, things may not be so rosy in a down market. The problem in a down market is
that the employee is liable to pay taxes (at the capital gains tax rate) on the value of the
initial stock grant, regardless of the price the employee actually realizes from selling the
shares. For example, let’s suppose that an employee receives a stock grant of 1000
shares in 2010 and that those shares are selling at $10 per share when vested to the
employee. That employee now has a tax liability based on $10 000 of deemed
employment income (let us say a tax bill of about $2200, based on an average marginal
tax rate of 44 percent); however, this tax does not need to be paid until the employee
sells the shares or the company is wound up or sold. Let’s suppose the down market
causes the shares to fall and that the employee eventually sells at $1 per share. The
employee realizes $1000 but faces a tax bill of $2200 on shares provided “free” to her or
him by a seemingly benevolent employer! As Compensation Today 11.5 shows, this
issue can even bankrupt employee-owners!

COMPENSATION TODAY 11.5

“BARGAIN SHARES” BANKRUPT UNLUCKY EMPLOYEE-OWNERS

Shannon McLeod, a marketing manager at BC-based Creo—a digital imaging company

—thought she knew a bargain when she saw one. Several years after the company had
given her stock options—which confer the right to purchase a specified number of
company shares at some point in the future at a fixed price—the value of those shares
had risen dramatically. When they were trading at $53, McLeod borrowed money to
purchase 10 000 shares at $17, which to her sounded like a terrific deal.

In purchasing those shares, she was deemed to have received employment income of
$360 000—the difference between what she paid for them and what their market value
was when she purchased them. At that time, she incurred a tax liability of $100 000
(taxed at the capital gains rate), which would not actually need to be paid to the Canada
Revenue Agency until she sold the shares or the company was wound up or sold.

As it turned out, Creo was sold, and at the time of sale, her shares were actually worth
slightly less than she had paid for them. She used the proceeds from the sale to repay
the loan she had taken out to purchase the shares, but she was still left with the $100
000 tax bill, which was now due. She then had to take out another loan to pay her taxes.
All in all, she ended up paying taxes of $100 000 on an investment that yielded her
nothing.

Although McLeod may not see it this way, she was actually luckier than some employees
at other firms, who saw their shares plummet to almost zero. For example, a former
Nortel manager, who was laid off in 1999, faced a tax bill of $204 000 on 1000 shares
then-worth 25 cents each.

A number of employees who have encountered this problem banded together to form
Canadians for Fair and Equitable Taxation, which lobbied the federal government for
changes to the tax rules that put them in this situation. Their aim was to effect changes in
line with those made to U.S. taxation rules in 2008 to deal with this problem. Changing
the status of the initial share gain from employment income to capital gains income
would allow employees to offset their capital gains with capital losses from the decline in
share prices.

In 2010, the government amended the law so that taxes would be collected when
options are exercised. Employers must withhold tax during the period in which
employees exercise their stock options. The federal government has provided some
taxation relief to employee-owners who have been affected in the taxation years 2000
and later, with regard to shares that were included in elections for deferral of taxable
benefit income. However, other employee-owners remain out in the cold and cases such
as Shannon’s continue.

In a more current case, an executive in Alberta had his remission order rejected following
his stock options plummeting in value after being exercised. The executive took this case
to the federal court upon being denied. The executive had been granted stock options,
which enabled him to purchase $75 000 shares at $0.95 per share. He had exercised his
option when the shares were worth $13.70 per share. The taxable employment benefit
was $956 250 as it was taxed at the capital gains rate. The executive had filed an appeal
at this point because he explained that he was classified as an insider and was restricted
from selling the shares right away. Therefore, the value of the shares could decrease.
The court ruled in his favour, and his employment benefit was reduced to $648 000.
However, when the Alberta executive sold his share later on, the shares were sold for
$228 750. Thus, he had lost $419 250, and his employment benefit of $648 000
remained. He still had to pay income tax on the employment benefit. When the executive
applied for remission at this point, his request was denied. The court contended that it
had been in his control to buy, hold, and sell the shares.
Though amendments have been made to the tax law, employees must still be cautious
and cognizant that if the company stock in which they own drops, this can result in a
capital loss that is only used against capital gains. When an employee chooses to
exercise their stock options and not immediately sell, they are now considered an
investor, not an employee.

Sources: Kathy Tomlinson, “Thousands of Canadians Taxed on ‘Phantom

Income,’” CBC News Online, May 25, 2009; Canadians for Fair and Equitable Taxation, -
personal communication, January 2013; Jamie Golombek, “What You Need to Know
About the Tax Consequences of Employee Stock Options,” Financial Post, November 9,
2018.

Employee Share Purchase Plans

In an employee share purchase plan, employees provide some kind of direct payment in
return for company shares. But they often do not have to pay full market price for these
shares, and firms offer many incentives to promote these purchases. Promotions include
subsidized or discounted prices or matching programs in which the firm provides an
additional share for each share purchased by an employee. In some cases, the company
pays the brokerage fees, while in others, it provides low- or no-interest loans for stock
purchase. In many cases, the company offers the convenience of payroll deduction.

Research by one of the authors suggests that these plans have apparently maintained
their popularity—at least until mid-decade, the most recent period for which data are
available. About one-fifth of medium to large Canadian firms have employee stock plans,
with the proportion being higher in publicly traded corporations and lower in privately
held corporations. Reasons for lower use in private corporations include more
complicated mechanics (discussed shortly) and owners’ reluctance to share ownership.

As for the tax status of employee stock purchase plans, the amount of the purchase
discount (if any) is deemed to be employment income (but is taxed at the capital gains
rate) and must be paid when the employee sells the shares or when the firm is wound up
or sold. The tax rules for share appreciation also apply to stock bonus plans.

Employee Stock Option Plans

Under an employee stock option plan, employees receive options to purchase company
stock at a future time at a fixed price. For example, if company stock is now trading at
$10 a share, then 1000 options with an exercise price of $11 a share might be issued to
each employee. Half of the options might be exercisable (when options become
exercisable, they are considered “vested” in the hands of the employees) a year after
they are granted, and the other half in two years with an exercise deadline (option expiry)
of five years. What this means is that one year from now, the employee has the option of
purchasing up to 500 shares of company stock at a price of $11 each. Obviously, if the
stock is trading at that time at, say, $9 a share, there will be no reason to exercise the
options. An employee who wants the stock could just purchase it through a stockbroker
for $9 a share.

But if the stock is trading at, say, $12 a share, employees have a decision to make. They
can exercise their options and purchase 500 shares at $11. But if they do purchase the
shares, there is the possibility that these shares will go down in price. Of course, they
might also go up in price. It’s a gamble. But employees who don’t want to gamble or who
don’t have the money with which to purchase the shares can simply cash out by
purchasing the shares and then selling them immediately at $12, thus realizing a net
gain of $500 (less any brokerage costs). The $500 would be deemed employment
income (but taxed at the capital gains rate).

But they need not exercise their options at this time either. They could just continue to
hold their options (for up to another four years because that is the expiry date) in the
expectation that stock prices will go up over the next four years. But if the stock price
sinks below the exercise price of $11 (when the stock price is below the exercise price,
the stock options are said to be “under water”) and never again rises above that price
(during the next four years), employees will not realize any value from their options. On
the other hand, they are not out of pocket any money, either, as they would be if they
had purchased and held the shares as they dropped below the $11 mark.

In the early 2000s, excessive executive stock options were cited as a factor in the
collapse of some major U.S. corporations and in the exorbitant increases in executive
compensation that have been taking place for a number of years. Part of the problem
was that due to a quirk in financial reporting systems, stock options appeared to be a
virtually “costless” way of providing compensation to executives. However, stock options
can exert a very real cost to shareholders by diluting share values. Recognizing this
problem, the United States and Canada developed new accounting rules that require
expensing of stock option grants.

When the Sarbanes-Oxley Act of 2002 was signed into law in the United States, one of
its requirements was to explore the implications of moving from a rule-oriented system of
GAAP to one that was more principle based.26The Sarbanes-Oxley Act was aimed at
ensuring the accuracy of financial information submitted by firms, with more punitive
penalties for firms that violate the Act. Canada became the first major jurisdiction to
require that all public companies expense employee stock-based compensation awards
as of January 1, 2004. The U.S. Financial Accounting Standards Board (FASB)
subsequently issued the Revised Financial Accounting Standard 123 requiring
companies to expense stock options.27 The Sarbanes-Oxley Act also required
companies to report all options grants within two days of the date of the grant, effectively
eliminating options backdating. As a result of these legislative and accounting
requirements, companies are now using fewer stock options and replacing them with
incentives that are more closely tied to firm and individual performance. A Hay Group
study shows that performance awards made up over half of the granted long-term
incentive value provided to CEOs in 2012 while stock options dropped to about a
quarter.28

In an even more recent survey by Willis Towers Watson of Canadian publicly traded
companies with revenues over $2 billion, 100 percent of the companies offered CEOs
and senior executives long-term incentive plans. Still, only 30 percent of salaried
employees were eligible for long-term incentive plans. The survey found that 95 percent
of the companies use performance share units, 85 percent use stock options, 55 percent
use restricted share units, and 15 percent use other long-term incentive plans, including
performance stock options or deferred share units. The study found that, though stock
options are still commonly used, the number of such plans within long-term incentive
plans and the number of individuals within a company that are entitled to this plan are
declining. Another Willis Tower Watson study found that performance share units have
surpassed stock options as the dominant long-term equity compensation incentive.29

Though recent information on private Canadian companies is less accessible, another

Willis Towers Watson Survey of privately held U.S. companies found that around 50
percent of participants had long-term incentives and the incentives were mainly for larger
companies. As compared to their public counterparts, long-term incentives amounts
were 30 percent lower, 80 percent of long-term incentives were performance cash plans,
and private companies were significantly less likely to use stock options. However, this
data is general, and some industries such as oil and gas and energy or technology,
where the company may be tight on cash, all employees may be eligible for stock
options.30

Phantom Share Plans

A phantom share plan ties an employee’s bonus to the performance of company stock,
but that employee never actually receives any stock. The employee is granted a certain
number of “units,” each corresponding to a share of stock. The employee is entitled to
the same dividends that accrue to the actual stock and also to the appreciation in share
value; both, however, are paid in cash at periodic intervals. Any payouts are considered
employment income and are taxed at the full employment income rate.

A variation on a phantom stock plan is a phantom equity plan.31 Professional service

firms—such as management consulting giants McKinsey & Company and Accenture—
developed this compensation method to help them retain staff who might otherwise be
drawn to high-tech companies better able to offer stock options or equity shares (which
professional services firms generally cannot do because they usually do not have a
corporate ownership structure). The plan is not in fact an employee stock plan because
the shares in question are not those of the employer; rather, it is a plan in which
employees are granted participation units in a pool of equities of client firms. The value
 of the units varies with the value of the fund. Employees are allowed to cash out only at
specified intervals and on termination, when they must do so.

Compensation Notebook 11.1 summarizes the main types of stock plans available as
well as the other main types of group and organizational performance pay plans.

COMPENSATION NOTEBOOK 11.1

TYPES OF GROUP AND ORGANIZATIONAL PAY PLANS

Gain-Sharing Plans

 Scanlon Plan
 Rucker Plan
 Improshare
 Family of Measures
Goal-Sharing Plans

 Single-Goal Plan
 Multigoal Plan
 Financially Funded Plan
Profit-Sharing Plans

 Deferred Profit-Sharing Plan (DPSP)

 Current Distribution Plan
 Combination Plan
Employee Stock Plans

 Share Bonus Plan

 Share Purchase Plan
 Stock Option Plan
 Phantom Share Plan
 Issues in Designing Stock Plans
The issues in designing an employee stock plan vary somewhat according to whether
the employer is a publicly traded or a privately held corporation. However, for all
companies, several factors differentiate more successful employee stock plans from less
successful ones. The effectiveness of employee share ownership increases with the
proportion of the employees who hold shares,32 the proportion of the firm owned by
employees,33 and the degree of employee consultation in the development of the share
plan.34 Employees must feel that they own enough shares to make a difference to their
financial well-being and must also feel a sense of real ownership in a corporate context
where effective mechanisms for employee participation in decision making are in
place.35 Also essential are effective procedures for educating employees about the
nature of the stock plan and communicating about company results.

Design Issues for Stock Plans in Public Corporations

Employee stock plans are simpler to implement in publicly traded corporations than in
privately held corporations because the public stock market provides a well-understood
mechanism for the purchase and sale of company stock. However, organizations still
must decide on a number of issues before implementing the plan:

 eligibility for inclusion,

 criteria for allocating stock among employees, and
 the type of holding period.
The first issue is eligibility for inclusion in the stock plan. In general, the more inclusive,
the better, although temporary employees and contract employees are usually excluded.
Often some minimal length of service is required, usually not exceeding one year.

Next, the criteria for allocating stock among employees must be decided. This allocation
can be based on salary (probably the most common approach), seniority, employee
performance, equal distribution, or some combination of these. Equal distribution is the
most egalitarian, but is it really fair to more senior employees, who may feel that they are
contributing more to the company’s success or who have shown long-term commitment
to the firm? Salary-based allocation has the advantage of maintaining the same
proportion of stock in the compensation mix for all employees. Equal allocation is the
simplest method, but adjustments typically still need to be made based on the number of
days or hours each employee worked in the preceding year.

The holding period is another critical issue. If the objective is to create employee-owners,
then some type of holding period should be imposed. Otherwise, it is very tempting to
sell the shares immediately to realize the profit in so doing. In general, the more
generous the stock plan, the longer the holding period. For example, if employees are
purchasing the shares at only a small discount from the market price, then only a short
holding period is justified, if any. But if employees are receiving the shares at no cost to
themselves, they may be required to hold the shares for up to five years.

Design Issues for Stock Plans in Private Corporations

Stock plans in private corporations must deal with the same issues as public
corporations, and some others besides.36 One key difference is that there is no external
market to place a value on company shares and to serve as a mechanism for purchasing
or selling the shares. Another difference is that the existing owners likely wish to prevent
the unfettered sale of the shares to maintain control of the firm. Still another difference is
that as minority shareholders in private corporations, employees may have very little
control or influence over what goes on in the organization and no easy way to liquidate
their shares if they are not happy with management or if they feel their interests are not
being well represented. Employee-owners in public corporations may also have very little
control, but at least they have the option of easily liquidating their holdings.

To deal with these issues, an artificial “market” is often set up. At regular intervals
(usually quarterly or annually), company shares are priced by an outside auditor, and
employees are allowed to purchase from or sell shares to other employees at these
times. If the available shares exceed the demand, the company will often agree to buy
back any shares up for sale. In general, when shares are issued, the company is given
“right of first refusal” so that employees must offer their shares to the company before
offering them to an outside buyer. In some cases, the board of directors is required to
approve the sale of any of the employee shares to outside investors. In some cases,
employees are not permitted to sell their shares except on termination or retirement from
the firm. In many cases, employees are required to sell if they terminate their
employment.

To help protect minority rights, employee shares should carry full rights to voting and
information. There should be guaranteed board representation for employee
shareholders and some legal protection for minority interests. For example, there could
be a clause requiring a majority of employee-owners to agree to major changes that
might materially affect their share value, such as sale or purchase of a plant or major
asset, or issuance of new classes of stock to existing owners. These types of provisions
are particularly important for share purchase plans, where employees must make a
significant investment to purchase the shares.37

NONMONETARY REWARD PLANS

“Dump the cash, load on the praise!” This is the advice of a well-known consultant who
has come up with “1001 Ways to Reward Employees,” many of which do not involve
money.38 He argues that what employees really want is recognition for their
achievements and affirmation that they are valuable members of the organization. This
recognition can take a variety of forms, ranging from simple praise to substantial prizes,
such as an all-expenses-paid holiday.

Certainly, many employers find this attractive advice because not spending money is
usually popular with employers. And as we have seen, there are many problems and
difficulties with individually based financial incentive plans. It is not surprising that over
half of medium to large Canadian firms now use formal noncash rewards to recognize
individual employee performance. About one-fifth of firms have group-based recognition
systems—in which all members of a team are recognized for the team’s success—in
addition to individual recognition. Some firms have noncash recognition programs that
recognize only group performance, but this is quite rare.

However, while firms may be loading on the praise, they are certainly not “dumping the
cash”; research shows that firms with noncash recognition plans actually have more
performance pay plans than do firms without noncash recognition.39

What exactly is a nonmonetary recognition award? Perhaps one of the most famous
examples is the “Golden Banana Award”: “When a senior manager in one organization
was trying to figure out a way to recognize an employee who had just done a great job,
he spontaneously picked up a banana [which had been packed in his lunch], and handed
it to the astonished employee with hearty congratulations. Now, one of the highest
honours in that company has been dubbed the ‘Golden Banana Award’.”40 Although
some recognition rewards may have financial value (as in the case of a restaurant
voucher or expenses-paid holiday), they are never provided as cash because the key to
their importance is their symbolic value, as this example illustrates.

There are some important caveats regarding the use of nonmonetary rewards. First,
such rewards are not a substitute for a fair and equitable pay system. Indeed, without an
adequate pay system and a collaborative and trusting relationship between workers and
management, employees will not likely attach much value to nonmonetary rewards. They
will likely see such rewards as an attempt to manipulate them into working harder while
withholding “real” (financial) rewards. And they will not value praise or recognition from
managers whom they don’t respect or trust.

But where there is equitable pay and employee–management trust, nonmonetary

rewards can be effective, as the Toyota case illustrated (see Compensation Today 3.1).
Overall, the arguments made by proponents of these reward systems are consistent with
Maslow’s theory: once lower-order needs are satisfied, then the needs for achievement
and recognition for this achievement can come to the fore. But to be effective, praise
must be grounded in actual achievement, follow accomplishment closely, and come from
a credible and respected source.
Given all this, nonmonetary rewards seem most suited to high-involvement
organizations, although they may also have applications in human relations
organizations. Because the foundations for success do not exist in classical
organizations, nonmonetary rewards will likely be of relatively little value there.

COMPENSATION TODAY 11.6

NOT ONLY MONEY AT GOOGLE

Often employees choose to leave a company due to a lack of recognition at their current
company. One study found that, on average, 66 percent of individuals confessed that
they would leave a company if they felt unappreciated. When taking into account only
Millennials, as many as 76 percent of individuals said that would look for another job.
Google, being a forward-thinking company, considered this sentiment. They offered
employees up to $1 million for top performance and high achievement. However, the
company quickly discovered that monetary employee recognition programs were
creating a toxic work environment and demotivating. The financial rewards were
promoting envy and animosity. Thus, the cash reward was phased out and, instead, the
company formed a new strategy that emphasized various nonmonetary rewards.

Rather than cash rewards, employees were rewarded with experiences, including
dinners, new technology devices, and vacations to Hawaii. Google has created four
programs to support their initiatives. The first recognition is a spot bonus program, which
is a way for managers to recognize a particularly extraordinary accomplishment. The
second recognition program is the peer bonus, in which employees acknowledge their
peers’ work and nominate that employee. Google’s third program is gThanks, where
employees can send online thank-you notes to coworkers. Lastly, employees are
recognized by group performance through the “no name program.” This program helps
leaders identify teams for exceptional performance, and teams get to celebrate with
celebrations or team trips. This recognition program has worked tremendously well. In a
study by PayScale, 86 percent of Google employees expressed satisfaction with their
jobs. Employees expressed that they find the new program more amusing, entertaining,
and that the rewards were more considerate as compared to the cash awards.

Sources: Jane Lemons, “Best Employee Rewards and Recognition Programs. Reward
and Recognize Employees Like Google,” Bucket List, December 11, 2017; “Employee
Recognition: The What, Why and How,” Employment Hero, October 17, 2019.
Types of Nonmonetary Reward Plans
Two important dimensions on which noncash recognition programs can vary is whether
they are formal or informal, and whether they recognize individual or group
performance.41 Informal programs, in which supervisors are encouraged to recognize
employee performance as part of their day-to-day management approach, will not likely
be effective without extensive managerial training and reinforcement by their superiors,
and may end up being rather hit or miss across different supervisors. To be effective, an
informal approach needs a supportive culture, such as a high-involvement managerial
strategy would provide.

Formal programs can be more systematic and consistent across organizational units but
even a formal program depends on the cooperation of supervisors for its success.

Regarding individual versus group recognition, if the organization depends on extensive

cooperation within teams or units, then it is probably best to develop a program that
provides recognition on both an individual and a group basis.

According to one expert, there are five types of nonmonetary awards—social reinforcers,
merchandise awards, travel awards, symbolic awards, and earned time off.42 Social -
reinforcers may range from a simple pat on the back to a valued training opportunity or a
company picnic. The general purpose is to demonstrate the value the firm places on its
employees.

Merchandise awards are given to individual employees to recognize performance

accomplishments. Travel awards can be provided to recognize individuals or, more
commonly, groups or teams for outstanding accomplishments. Symbolic awards are
exemplified by the “Golden Banana” award. Earned time off can be used to recognize
individuals or teams that have gone “above and beyond” the call of duty in finishing a
project or assignment.

Issues in Designing Nonmonetary Reward Plans

In any recognition system, the recognition must be truly deserved, and awards must not
be handed out because they are relatively cheap. In general, the more inexpensive the
reward, the more judiciously it must be provided if it is to be seen as having any value at
all. In addition, it is important to avoid singling out individuals for recognition if their
accomplishments have been achieved in a team context or with the help of other
employees. This would lead to only divisiveness and discord.

It is best to structure these programs so that it is possible to recognize all deserving

employees. For example, instead of saying that the employee with the highest sales will
receive a recognition award, say that “all employees who achieve a 10 percent increase
in sales” will receive a recognition award. Artificially “rationing” recognition goes against
the principle of these programs, which is that any employee with a significant
accomplishment should be recognized.

Another major issue is determining how to identify those individuals and teams deserving
of formal recognition. Of course, any manager is free to provide recognition through
praise and other informal means whenever he or she wishes. But for major recognition
awards, many organizations use an elected committee of employees and managers.

At RBC, employees who wish to nominate a coworker can go online to do so. Then the
nominee’s immediate manager reviews the nomination. That manager may award a
small recognition on the spot or may make a recommendation to the recognition
committee.43

While a recognition program must focus at the grassroots level and become part of the
corporate culture, keeping it alive and vibrant usually requires a champion who will take
the lead in promoting the program. At RBC, a five-person unit is in charge of the
recognition program, constantly monitoring its health and coordinating the recognition
budget. To help promote and publicize the program, the bank uses a recognition intranet
page. It also has 30 “recognition counterparts” scattered throughout the organization,
from all functions and departments, who act as point persons for recognition in that part
of the organization and who answer questions about the program. The recognition
budgets for each area of the organization are funnelled through these people.

In terms of the awards themselves, the bank’s recognition is in the form of “recognition
points.” Employees can redeem these points for a variety of awards (except cash), which
enables them to select an award that is valuable to them. Employees can also
accumulate recognition points in order to garner a larger recognition award.

Through this program, RBC is showing the importance it places on its employees as the
key driver of business success. As earlier RBC examples interspersed throughout the
book have shown, nonmonetary rewards are just part of the total reward program at the
bank. The program as a whole is designed to help create a culture of employee
commitment to the organization and its goals.

SUMMARY
This chapter identified the key issues in the design of group and organizational
performance pay plans as well as some of the key issues in designing noncash
employee recognition plans.

There are four main types of gain-sharing plans—Scanlon, Rucker, Improshare, and
family of measures—each of which uses a different formula for calculating productivity
 increases. You now understand the key issues in designing these plans and recognize
that they suit stable organizations much better than more dynamic organizations.

Goal sharing is a more flexible system than gain sharing. It also has the potential to be
more arbitrary, both in the criteria for goal achievement and in the amount of the bonus
for goal achievement. When designing these programs, you need to create challenging
but attainable goals; this may be more difficult in dynamic organizations.

Although simpler to develop than gain sharing or goal sharing, profit-sharing plans
present a multitude of design choices. To succeed, these plans need extensive
communications, implementation in a high-involvement setting, and allocation of the
profit-sharing bonus by individual performance, where permitted by circumstances (i.e.,
availability of fair, accurate, and accepted individual performance measures).

The key issues in the design of employee stock plans and the major types (stock bonus
plans, stock purchase plans, stock option plans, and phantom stock plans) were
discussed. For an employee stock plan to succeed, it needs to incorporate widespread
implementation, significant ownership for employees, and mechanisms for extensive
employee participation within the enterprise.

Finally, you learned that nonmonetary recognition programs can play in a total rewards
system. Effective noncash employee recognition program need to ensure that all
deserving employees receive recognition, that the process for determining recognition is
fair, that team-based recognition is provided when warranted, and that nonmonetary
rewards are not used a substitute for equitable monetary rewards.

Key Terms
 family of measures plan
 Improshare
 phantom equity plan
 phantom share plan
 Rucker plan
 Scanlon plan
 share appreciation rights

Discussion Questions
Discussion Question 11.1
What are the key issues to be considered when designing gain sharing plans?
Your Answer
No answer submitted

Discussion Question 11.2

When designing a profit-sharing plan, what design issues do you think would
prove to be the most difficult to decide?
Your Answer
No answer submitted

Discussion Question 11.3

What issues should you consider when designing a goal sharing plan for a
group of sales employees?
Your Answer
No answer submitted

Discussion Question 11.4

Discuss the pros and cons of nonmonetary reward programs.

Your Answer
No answer submitted

Discussion Question 11.5

Review expectancy theory from Chapter 3. Now, using expectancy theory,

discuss the potential motivational impact of profit-sharing pay systems on
employees.
Your Answer
No answer submitted

Exercises
Loading...

Exercise Question 11.2

Examine the two profit-sharing plans described in Compensation Today 11.3.

Evaluate the possible impact of each. Which do you think will be most
effective, and why do you think so? What additional information would be
useful in order to draw firm conclusions?
Your Answer
No answer submitted

Exercise Question 11.3

Assume you are an employee in a firm that is planning to implement profit

sharing. As an employee, identify the design features you would like to see
included. Then, in a small group, compare your desired plans. How do they
differ, and what do you think are the reasons for the differences?
Your Answer
No answer submitted

Case Questions
Case Question 11.1

You are a team of top-notch compensation consultants hired by Alliston

Instruments (refer to Case 6, in the Appendix). After analyzing the various
options available, you have decided that a group pay plan would be beneficial
to this organization. Select the specific group plan that would seem to work
best; then design it, describing specifically how you would deal with the
various design issues. When you are done, the plan should be ready for
implementation.
Your Answer
No answer submitted

Case Question 11.2

You have decided that The Fit Stop (refer to Case 2 in the Appendix) would
be well suited to an organizational performance pay plan. Select the specific
organization pay plan that would seem to work best; then design it, describing
specifically how you would deal with the various design issues. When you are
done, the plan should be ready for implementation.
Your Answer
No answer submitted
 Simulation Cross-Reference
If you are using Strategic Compensation: A Simulation in conjunction with this text, you
will find that the concepts in Chapter 11 are helpful in preparing the simulation.

Endnotes
1. John G. Belcher, Gain Sharing(Houston: Gulf, 1991).
2. Mitchell Fein, IMPROSHARE: An Alternative to Traditional
Managing (Hillsdale: Mitchell Fein, 1981).
3. R.T. Kaufman, “The Effects of IMPROSHARE on
Productivity,” Industrial and Labor Relations Review 45 (1992): 311–22;
John Shields et al., Managing Employee Performance & Reward:
Concepts, Practices, Strategies (Cambridge University Press, 2015).
4. Belcher, Gain Sharing.
5. Ibid.
6. Kaufman, “The Effects of IMPROSHARE.”; John Shields et
al., Managing Employee Performance& Reward: Concepts, Practices,
Strategies (Cambridge University Press, 2015).
7. Richard J. Long, “Group-based Pay, Participatory Practices, and
Workplace Performance.” Paper presented at the Conference on the
Evolving Workplace, Ottawa, September 2005, 28–29.
8. For example, see Kenneth Mericle and Dong-One Kim, Gainsharing
and Goalsharing: Aligning Pay and Strategic Goals (Westport: Praeger,
2004). See also Christine Cooper, Bruno Dyck, and Norman Frohlich,
“Improving the Effectiveness of Gainsharing: The Role of Fairness and
Participation,” Administrative Science Quarterly 37, no. 3 (1992), 471–
90. See also Theresa M. Welbourne, David B. Balkin, and Luis Gomez–
Mejia, “Gain Sharing and Mutual Monitoring: A Combined Agency–
Organizational Justice Interpretation,” Academy of Management
Journal 38, no. 3 (1995): 881–99. See also Theresa M. Welbourne and
Daniel M. Cable, “Group Incentives and Pay Satisfaction:
Understanding the Relationship Through an Identity Theory
 Perspective,” Human Relations 48, no. 6 (1995): 711–26. See also
Dong-One Kim, “Factors Influencing Organizational Performance in
Gainsharing Programs,” Industrial Relations 35, no. 2 (1996): 227–44;
Sachin H. Jain and Daniel Roble, “Gainsharing in Health Care Meeting
the Quality-of-Care Challenge: In Health Care, Gainsharing Carries
Unique Challenges, but the Benefits are Worth the Effort,” Healthcare
Financial Management 62, no. 3 (2008): 72–79; Frances A. Kennedy,
James M. Kohlmeyer, and Robert J. Parker, “The Roles of
Organizational Justice and Trust in a Gain-Sharing Control System,”
in Advances in Accounting Behavioral Research (Emerald Group
Publishing Limited, 2009).
9. Long, “Group-based Pay.”
10. Lisa D. Ordonez, Maurice E. Schweitzer, Adam D. Galinsky, and
Max H. Bazerman, “Goals Gone Wild: The Systematic Side Effects of
Overprescribing Goal Setting,” Academy of Management
Perspectives 23, no. 1 (2009): 6–16.
11. Mericle and Kim, Gainsharing and Goalsharing; Angappa
Gunasekaran, Amir M. Sharif, Chee Yew Wong, and Nuran Acur,
“Understanding Inter-Organizational Decision Coordination,” Supply
Chain Management: An International Journal 15, no. 4 (2010): 332–43.
12. Edward E. Lawler, Rewarding Excellence: Pay Strategies for the
New Economy (San Francisco: Jossey–Bass, 2000), 228.
13. K.M. Bartol and E.A. Locke, “Incentives and Motivation,” in
Compensation in Organizations: Current Research and Practice, ed.
S.L. Rynes and B. Gerhart (San Francisco: Jossey-Bass, 2000), 104–
50; Shikha Sahai and A.K. Srivastava, “Goal/Target Setting and
Performance Assessment as Tool for Talent Management,” Procedia-
Social and Behavioral Sciences 37 (2012): 241–46.
14. Three Canadian studies found that profit sharing was more likely in
high-involvement organizations than in classical and human relations
organizations. See Terry H. Wagar and Richard J. Long, “Profit Sharing
in Canada: Incidence and Predictors,” Proceedings of the
Administrative Sciences Association of Canada, Human Resources
 Division 16, no. 9 (1995): 97–105. See also Richard J. Long, “Motives
for Profit Sharing: A Study of Canadian Chief Executive
Officers,” Relations industrielles/Industrial Relations52, no. 4 (1997):
712–733. See also Richard J. Long, “Performance Pay in Canada,”
in Paying for Performance: An International Comparison, ed. Michelle
Brown and John S. Heywood (Armonk: M.E. Sharpe, 2002); Kym
Hambly, Rinu Vimal Kumar, Mark Harcourt, Helen Lam, and Geoffrey
Wood, “Profit-Sharing as an Incentive,” The International Journal of
Human Resource Management 30, no. 20 (2019): 2855–75.
15. Richard Long and Tony Fang, “Do Strategic Factors Affect
Adoption of Profit Sharing? Longitudinal Evidence from Canada,” The
International Journal of Human Resource Management 26, no. 7
(2015): 971–1001.
16. Stephen Bruce, “The Three Approaches to Profit-Sharing,” HR
Daily Advisor, April 30, 2014,
[Link]
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17. “The Billes Family, Founders of Canadian Tire Corporation,
Honoured with Retail Council of Canada’s Lifetime Achievement
Award,” Canada NewsWire, May 13, 2015,
[Link]
[Link]/docview/1680516933?accountid=15182,
accessed March 30, 2020.
18. Michael McKiernan, “Keeping it Simple: Ikea’s DPSP Reinforces
Founder’s Values,” Benefits Canada, May 11, 2018,
[Link]
focus-on-simplicity-114010, March 30, 2020.
19. “Part XIII—Benefit Plans,” Government of Ontario,
[Link]
interpretation-manual/part-xiii-benefit-plans, accessed March 30, 2020.
20. Brad Cherniak, “How to Share Profits with Your Staff Without
Running into Problems,” Financial Post, October 15, 2013,
[Link]
 with-your-staff-without-running-into-problems, accessed March 30,
2020.
21. Richard Yerema, Canada’s Top 100 Employers(Toronto:
Mediacorp, 2005)
22. Richard J. Long and Tony Fang, “Do employees profit from profit
sharing? Evidence from Canadian panel data,” ILR Review 65, no. 4
(2012): 899–927.
23. Jeffrey Carpenter, Andrea Robbett, and Prottoy A. Akbar, “Profit
Sharing and Peer Reporting,” Management Science 64, no. 9 (2018):
4261–76.
24. Richard J. Long and Tony Fang, “Do employees profit from profit
sharing? Evidence from Canadian panel data,” ILR Review 65, no. 4
(2012): 899–927.
25. Richard J. Long, “Employee Profit Sharing: Consequences and
Moderators,” Relations industrielles/Industrial Relations55, no. 3
(2000): 477–504.
26. Stephen Spector, “Expensing Stock Options.” CGA Magazine,
March–April 2004, at
[Link]
04/Mar-Apr/Pages/ca_2004_03-04_dp_standards.aspx.
27. Summary of Statement No. 123 (revised 2004), Financial
Accounting Standards Board, at
[Link] accessed October 2,
2016.
28. Executive compensation 2013: Data, trends and strategies. © 2014
Hay Group.
29. Julius Melnitzer, “A Look at Trends in Long-Term Incentives
Plans,” Benefits Canada, April 16, 2018,
[Link]
incentive-plans-113345, March 29, 2020.
30. Ibid.
31. Helen H. Morrison and Joseph S. Adams, “New Type of Phantom
Equity Plan Used to Combat Employee Defections,” Journal of
Employee Ownership Law and Finance 13, no. 1 (2001): 109–26.
32. Alex Bryson, Andrew E. Clark, Richard B. Freeman, and Colin P.
Green, “Share Capitalism and Worker Wellbeing,” Labour
Economics 42 (2016): 151–58.
33. Ernest H. O’Boyle, Pankaj C. Patel, and Erik Gonzalez-Mulé,
“Employee Ownership and Firm Performance: A Meta-
Analysis,” Human Resource Management Journal 26, no. 4 (2016):
425–48.
34. Long, “Employee Profit Sharing.”; Andrew Pendleton and Andrew
Robinson, “Employee Stock Ownership, Involvement, and Productivity:
An Interaction-Based Approach,” ILR Review 64, no. 1 (2010): 3–29;
Jennifer A. Harrison, Parbudyal Singh, and Shayna Frawley, “What
Does Employee Ownership Effectiveness Look Like? The Case of a
Canadian-Based Firm,” Canadian Journal of Administrative
Sciences/Revue Canadienne des Sciences de l’Administration 35, no. 1
(2018): 5–19.
35. Rosen et al., “Every Employee an Owner.”
36. For examples of employee ownership systems in private Canadian
corporations, see Carol Beatty and Harvey Schacter, Employee
Ownership: The New Source of Competitive Advantage (Toronto: John
Wiley and Sons, 2002); “Share Structure and
Shareholders,” Government of Canada, [Link]
[Link]/eng/[Link], accessed March 30, 2020; Richard Harroch,
“How Employee Stock Options Work in Startup Companies,” Forbes–
February 27, 2016,
[Link]
stock-options-work-in-startup-companies/#9c20c9e6633f.
37. An excellent source of information on the technical aspects of
designing employee share plans in Canada is Perry Phillips, Employee
Share Ownership Plans (Toronto: John Wiley and Sons, 2001).
38. Bob Nelson, “Dump the Cash, Load on the Praise,” Personnel
Journal 75, no. 7 (1996): 65–70. See also Bob Nelson, 1001 Ways
to Reward Employees (New York: Workman, 1994); or Bob Nelson,
1001 Ways to Reward Employees: 100s of New Ways to Praise (New
York: Workman, 2005).
39. Richard J. Long and John L. Shields, “From Pay to Praise? Non-
Cash Employee Recognition in Canadian and Australian
Firms,” International Journal of Human Resource Management 21, no.
8 (2010): 1145–72.
40. Dean R. Spitzer, “Power Rewards: Rewards That Really
Motivate,” Management Review 85, no. 5 (1996): 48–49.
41. J.–P. Brun and N. Dugas, “An Analysis of Employee Recognition:
Perspectives on Human Resources Practices,” International Journal of
Human Resource Management 19, no. 4 (2008): 716–30.
42. Jerry L. McAdams, “Nonmonetary Rewards: Cash Equivalents and
Tangible Awards,” in The Compensation Handbook: A State-of-the-Art
Guide to Compensation Strategy and Design, ed. Lance A. Berger and
Dorothy R. Berger (New York: McGraw–Hill, 2000), 241–59.
43. David Brown, “RBC’s Recognition Department Oversees
Rewarding Culture,” Canadian HR Reporter 18, no. 5 (2005): 7–9.