ASSIGNMENT # 2
Human Resource Management

Ramish Ashraf
12126003
BTCM

Submitted To: Sir Hassan Jabbar
Submission Date: -01-2015

Q#1: What are the practical consequences of using employee stock options as a motivator?
Ans: Employee Stock Options (ESO):
An employee stock option is a contract issued by an employer to an employee to purchase a set amount of shares of company stock at a fixed price for a limited period of time.
A stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An employee stock option is slightly different from a regular exchange-traded option because it is not generally traded on an exchange, and there is no put component. Furthermore, employees typically must wait a specified vesting period before being allowed to exercise the option.
Types of Employee Stock Options:
There are two broad classifications of stock options issued:
1: Non-qualified stock options (NSO)
2: Incentive stock options (ISO).
Practical Consequences Explanation:
The idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock appreciate, so rewarding employees when the stock goes up ensures, in theory, that everyone is striving for the same goals. Critics point out, however, that there is a big difference between an option and the ownership of the underlying stock.
If the stock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn't feel the same pain as the owner of the stock. This is especially true with employee stock options because they are often granted without any cash outlay from the employee.
Another problem with employee stock options is the debate over how to value them and the extent to which they are an expense on the income statement. This is an ongoing issue in the U.S. and most countries in the developed world. * Moreover, tax consequences can also be tricky. * Dilution can be very costly to shareholder over the long run. * Stock options are difficult to value. * Stock options can result in egregious compensation of executive for mediocre business results. * Retained earnings are not counted in the exercise price. * An individual employee is dependent on the collective output of all employees and management for a bonus.
The purpose of stock options is to align company and employee interests by making employees owners. However, options are not very useful for this purpose, because employees tend to sell the stock instead of holding onto it.
In recent years, stock option use has declined. One reason for this is the changes in options accounting. Before 2005, companies did not have to report options as an expense. After the changes in accounting rules, it became more expensive for companies to offer options. Moreover, options are less attractive or motivational for employees when the stock market is going down, because the cost of exercising their options may be higher than the market value of the shares. Because of these and other problems, some companies started granting employees actual stock or using other incentives.
Conclusion:
Hence, from the above discussion, it is concluded that stock options moreover have an unintentional negative impact. They enable top-level managers who are not sufficiently supervised to amass large incomes at the owners’ expense. Stock options allow managers to act in a selfish manner and may even encourage such behavior. Therefore, the complex task of motivating managers cannot be reduced to simple extrinsic incentives. On the contrary, new, alternative motivational tools should be actively sought out.

Q#2: What advantages do flexible benefits offer for individual employees and their employers?
Ans: Flexible Benefits:
A benefits plan that allows employees to select from a pool of choices, some or all of which may be tax-advantaged. Potential choices include cash, retirement plan contributions, vacation days, and insurance. also called cafeteria plan. A Flexible Benefit Plan can be a valuable recruiting tool. Once exposed to the value and versatility of a Flexible Benefit Plan, many employees have told us they would not want to be without one. It can make the difference when you are trying to attract talented, committed professionals to your company. It will also increase your current employees' satisfaction with their benefits package, which enhances your ability to retain your valuable staff members.
Flexible benefit schemes are formalized systems that allow employees to vary their pay and/or benefits package in order to satisfy their personal requirements. They are not the same as voluntary benefit schemes where employees pay for extra benefits. With flexible benefit schemes, employees have the choice to retain their existing salary and simply vary the levels of benefits within their allowance, or adjust their salary up or down by taking fewer or more benefits respectively, depending on the offer. Many organizations have always allowed a limited form of flexibility for just one or two benefits, but it is only recently that comprehensive flexible benefit schemes have started. Flexible benefits bring clear advantages to both employee and employer. It is a strong employee motivator, providing greater choice and empowerment to individuals, but still within the context of the employer’s overall strategy and objectives.
Advantages For Employers:
From an employer perspective, the advantages can be split into two broad categories, the hard business advantages as well as the softer human factors. * Hard Dollar Savings:
Every dollar employees defer into the Flexible Plan is withheld from their pay before any taxes are calculated. As the employer, you will save your portion of Social Security tax, Medicare and any other taxes your state requires you to contribute on behalf of your employees. In addition, in most states your Workers Compensation premiums will be calculated on your employees' "after-flex" salary. * Soft Dollar Savings:
By implementing a Flexible Benefit Plan you will be offering employees the opportunity to keep some of what would have otherwise disappeared in taxes. It is like giving your current employees a "raise" that does not cost you a penny in cash or payroll taxes. * Competitiveness:
Employees view flexible benefits as more advantageous than traditional insurance plans, since they can choose the benefit options that best suit their needs and the needs of their family. * Recruiting & Retaining Talented Professionals:
A Flexible Benefit Plan can be a valuable recruiting tool. Once exposed to the value and versatility of a Flexible Benefit Plan, many employees have told us they would not want to be without one. It can make the difference when you are trying to attract talented, committed professionals to your company. A Flexible Plan will also increase your current employees' satisfaction with their benefits package, which enhances your ability to retain your valuable staff Members. * Cost containment:
By choosing only the benefit options that they need, employees are more involved and make better financial decisions that help to keep costs down

Advantages For Employees:
From an employee perspective, the advantages of flexible benefits are given below: * Choice Over Benefits:
Employees can choose the level of coverage for benefits that best suit their needs and the needs of their family. They can add coverage where they need it most and reduce coverage where they need it less. * Choice Over Remaining Credits:
After an employee has paid for their core and optional benefits, any remaining credits can be disbursed depending on the options offered by the employer. * Make Changes To Their Plan:
Employees have the opportunity to review their flexible benefit options during the annual enrolment period or as life events occur.

Conclusion:
As a result of the sharper focus on the benefits package that flexible benefits bring, employees may value their benefits more. Flexible benefits enables the employer to recognize the differing needs and aspirations of an increasingly diverse workforce whilst enabling the employees’ to exercise a degree of choice in the make-up of their remuneration packages by making a trade-off between perks. Indeed the main advantages of operating a flexible benefits scheme are reported, in descending order as, better targeting of benefits, better appreciation by employees and more competitive packages.