Business Research Report
Compensation Strategies

Assessment Code: RWT1
Student Name: Jeannie Altmaier
Student ID: 000284655
Date: 04/20/2014
Mentor Name: Kathy Huffman

Contents
Executive Summary 3
Introduction 4
Research Findings 5
Stock Options 5
Tuition Reimbursement 6
Merit Plans 7
Conclusion 8
References 10

Executive Summary

In a business the main focus is become as successful as possible. In order to gain success and maintain the success a business must have a reliable and dependable staff. With this being said it is important to compensate employees to maintain and develop the best work performance possible. The success of the business is depended on the employees. Research has been done on three compensation strategies that benefit the employees and company, those three compensation strategies are implementing stock options, tuition reimbursement, and merit plans.

Stock options benefits have been known as an attractive way to reward employee performance. It is important for the organization to claim the stock options to be capitalized on the balance sheet so shareholders can track EPS, which in return is beneficial to the organization as well. This compensation benefit has been around for decades and continued to grow until the increase in accounting rules in 2001. With more rules implemented it allows for the companies to maintain a fairness in the workplace. This option should be offered to all employees but is not require for the employee to exercise. The beginning step to be made for the organizations is to determine at what price the employee may purchase stock options at and for what timeframe.

Tuition reimbursement has been shown to benefit employees’ knowledge along with making the organization more competitive in the competitive environment. With only 63% of business offering tuition reimbursement, this allows our organization to have upper hand in recruiting new talent. This method should be a set amount for the employee to continue their education or gain an education in an academic area related to the organization or work area the employee is in. The organization should also set guidelines for the amount of tuition allotted by the employees GPA. Along with keep a specific GPA the employee with be contracted to work for the organization for 15 months after the payment of tuition is made.

The merit plan bonus compensations strategy is proven that employees will have higher performance rates. Each employee will be evaluated by work performance annually and a certain percentage based on their current base pay will be applied depending on the employees’ evaluation. The hiring department at a company is allowed to grant promotion and reclassifications increases up to 15%, any percentage after 15% must be to the staffing and compensation analysis along with reasoning for the promotional increase. This requirement while keep the merit plan incentives fair and even among all employees. To avoid unfair evaluations the OPM (The Office of Performance Management) has begun monitoring the rankings as well. Each year the organization will need to evaluate market conditions and available funding, this will help guide the distribution of the benefit evenly among the employees.

After research and evaluation I do believe that stock options, tuition reimbursements, and merit plans will be a positive incentive in our company. With these additional compensation benefits the employees work performance will increase, making our company more competitive in the work environment.
Introduction

With a growing company of over 100 employees ranging in different salaries, it is important to keep our current and future employees in mind. A company’s success and future is determined by many things but most importantly by the hard work and dedications of our employees. This makes it equally important for our company to continue to improve compensation benefits for the employees and to attract high talented employees. With research and evaluation there are three main compensation benefits that I feel would compensate our employees nicely.

The first compensations benefit suggestion would be to implement stock options. This option would allow the employees to feel as if they were a bigger part of the company. It would also be a high motivator to upper management, the better the company does the higher the stock would raise. The company could distribute a set amount of stock options yearly to employees of varied salaries as a compensation bonus allowing only employees to exercise. This will also allow the company to benefit by using the employee stock options as a deduction on their taxes. The company could also allow a stock option plan for employees to buy into stock options at a set price for so many years. This gives the employee an opportunity to contribute in ownership of the company. Stock option is a flexible compensation bonus that can vary in many different ways depending on how the company wants to distribute the options such as yearly or who they want to give the option to such as “key” employees.

The second compensation benefit suggestion would implementing tuition reimbursement. Tuition reimbursement is an option to employees to extend their education or allow employees to gain an education while the company pays for a certain percentage of the tuition to attend. With this option employees would be obligated to work for the company for a certain amount of time after tuition has been distributed. Depending on the type of options the company wants to offer, many companies only allow the reimbursements to education that is work related or that would be beneficial to the workplace.

The third compensation benefit for employees would be merit plans or pay for performance plans. This would allow salaried employees to also be compensated for their performance. Merit plans include pay raises or lump sum bonuses based on a performance base rate. This type of bonus has to be managed closely and monitored strictly. Many employees react highly in companies when their rewards are based strictly on performance. The company will set standards for performance and rate employees on the same scale for merit compensations.

Research Findings

After much research done on relevant sources for compensation benefits, it is brought to our attention that three main compensation benefits should be considered in our company for the many different positions and salaried employees: 1) adding stock options as a benefit offered to key employees; 2) allowing tuition reimbursements to employees wanting to gain or further their education; 3) implementing merit plans for employee performances.

Stock Options

The offering of stock options to employees has been around for decades, since the 1980’s companies offering stock options to employees has grown tremendously. This was a compensation method used to reward upper management and key employees, now many companies value all employees as key employees and the offering of stock options has grown. As of 2012 the NCEO estimated that nine million employees obtained stock options and thousands of others held some form of individual equity in the company. These numbers have dropped since 2001 due to increase in accounting rules. (NCEO, 2014)

What exactly is stock options you may ask? Stock options is the purchase or ownership of shares in the company. Employees are offered the chance to buy stocks at the grant price or market price for a certain time frame, normally this is set in a span of years. The employee then holds the ownership in these stock options in hopes of the market price raising allowing the employee to sell and profit the difference. This has been known as an attractive way to obtain and reward staff on performance. (NCEO, 2014)

Stock options being sold to employees significant differences from those sold on the exchange. There are many rules that apply to the stock options sold to employees for instance only the employee can exercise the options, there is a risk free rate of return usually within a three to six month time frame, the companies expected dividend rate for security, the price for exercising the options, and the expected terms and duration of the options. (Barnes, 2010)

The theory for some companies has been if a portion of the CEO salary was some form of stock options they in return would be driven to perform better for the company resulting in higher stock prices for a longer term. This action would then benefit both stock holders and executives of the company. Companies can also deduct options for taxes purposes, however the same amount should show on their income statement. Another alternative is that the options can be capitalized on the balance sheet. The balance sheet is now starting to grow in popularity allowing stock holders to run a pro forma calculation to see the impact on EPS (earnings per share). Using the balance sheet also shows the nature of the obligations and avoiding the EPS impact. (Wyman, 2011)

Analysis: Stock options have come a long way in the last few decades. This has allowed for more guidelines and procedures that must be followed. With stock options being implemented as a compensation benefit this allows employees to feel as if they are a bigger part of the company. I also believe it will give them the incentive to perform at a higher performance rate. This many make our company a more attractive competitor when it comes to recruiting new talent.

Tuition Reimbursement

In today’s society college enrollments are sky rocketing, many Americans are realize now is the time to gain the education you need to make it in the real world. Surveys have shown that 84.7% of companies are offering tuition reimbursement to their employees. "The economic state of the past couple of years has amplified individuals' awareness of the importance of education," said Amy Kaminski, director of marketing for Compdata Surveys. (Vocus PRW Holding, LLC, 2010) This compensation benefit is not only being proof of offering a valuable benefit to their employees but the company is also benefiting a competitive edge with the knowledge being brought back into the workplace.

There are many guidelines that must be followed in order for an employee to gain the benefits of tuition reimbursement. Studies show that 63% of companies offering reimbursement program require their employees continue to be employed at the current employer for 15 months after the reimbursement takes place. Also 86% of companies require that the employee take certain courses that are beneficial to the company or current position to gain the benefit of tuition reimbursement. (Vocus PRW Holding, LLC, 2010). Most companies only allow a certain annual maximum for the reimbursement program with tuitions being so expensive. Also wit o the company guidelines it is not unknown for a company to require the employee to hold a certain grade point average to continue collecting the tuition reimbursement benefits. Depending on grade point average could also depend on the amount of tuition reimbursement benefit the employee receives, for example an employee with an A many receive 100% of the benefit, as for a student with C may only receive 50% of the benefit. The only down fall the a benefit such as the tuition reimbursement is that when a company hits a recession tuition reimbursement is one of the top benefits that will be cut and is usually on of the last to be reinstated. (Landis, 2012)

Analysis: With percentages of companies offering tuition reimbursement slightly over 50%, this type of compensation benefit gives our company an upper hand when recruiting new talent into our company. The benefits of tuition reimbursement have many guidelines that must be followed in order to gain the full amount of the benefit showing the company which employees will be worth investing in and the seriousness of the employee. Along with the employee bettering his or her knowledge, the company is gaining a more completive edge with fresh knowledge and skills in the workforce.

Merit Plans

Merit plans are rewards based on work performance. Merit eligibility depends on the staff policy and the collective bargaining agreement. Merit plans and the amount of increase are evaluated in a few different ways such as the individuals’ performance along with current pay, the responsibilities assigned to the employee, the performance of the employee compared to the members of the unit and most importantly the companies’ available funds. No merit for an individual can rise above the range maximum salary and also cannot fall below the range minimal salary. Salary structures for merit base pay is evaluated annually and adjusted due to market conditions or the companies funding. The hiring department at a company is allowed to grant promotion and reclassifications increases up to 15%, any percentage after 15% must be to the staffing and compensation analysis along with reasoning for the promotional increase. (UCSF Human Resource, 2013)

At the end of a performance year the employees are evaluated on a performance base scale, depending on the performance rate earned determines the increase added into base pay. The performance rewarded this year continues to be reward for the remaining years at the company. Merit pay does have a small but significant impact on employees’ performance rates. Higher performance rates are almost always linked to a high merit increase. The removal of the merit plan system seems to result in lower performance rates. (Milkovich, Newman, Gerhart, 2014)

To avoid unfair evaluations the OPM (The Office of Performance Management) has begun monitoring the rankings. For merit plans to live up to its full potential, the system needs to be monitored better, this means a better way to allocate raises: be more accurate of the performance ratings: allocate enough merit money to reward all performances: makes sure the size of the merit increases are different in all the different performance levels. (Milkovich, Newman, Gerhart, 2014)

In order to help evaluate performance, the merit system principles provide guidelines to responsible behavior. There are the five components processes of effective management which are planning, monitoring, developing, appraising, and rewarding. (US Office of Personal Management, 2014). These are tools to help guide the industries in the right morale and consistent directions are far as performance evaluations.

Analysis: With the correct monitoring of performance evaluations and the accurate amount of funds available to distribute, the merit plan could be beneficial to any business. The main key I see is making sure all funds are distributed evenly to the appropriate employees whose performance ratings deserved the increase. Performance base compensation allows for the company to benefit from high performance ratings. Also take into consideration that merit plans could also decline performance rates if the funding was to become scares.

Recommendation: The first recommendation I have gathered from extensive research is to implement stock options to current and future employees. This option should be offered to all employees but is not require for the employee to exercise. The beginning step to be made is for the organizations to determine at what price the employee may purchase stock options at and for what timeframe. It is also important for the organization to claim the stock options to be capitalized on the balance sheet so shareholders can track EPS, which in return is beneficial to the organization as well. This compensation benefit has been around for decades and continued to grow until the increase in accounting rules in 2001. This method has been known as an attractive way to reward employee performance.

Recommendation: The second recommendation I suggest to adopt is the tuition reimbursement. This method should be a set amount for the employee to continue their education or gain an education in an academic area related to the organization or work area the employee is in. The organization should also set guidelines for the amount of tuition allotted by the employees GPA. Along with keep a specific GPA the employee with be contracted to work for the organization for 15 months after the payment of tuition is made. This method has been shown to benefit employees’ knowledge along with making the organization more competitive in the competitive environment. With only 84% of business offering tuition reimbursement, this allows our organization to have upper hand in recruiting new talent.

Recommendation: The last recommendation that would should be established in the organization is merit plans. Each year the organization will need to evaluate market conditions and available funding, this will help guide the distribution of the benefit evenly among the employees. Each employee will be evaluated by work performance annually and a certain percentage based on their current base pay will be applied depending on the employees’ evaluation. The hiring department at a company is allowed to grant promotion and reclassifications increases up to 15%, any percentage after 15% must be to the staffing and compensation analysis along with reasoning for the promotional increase. This requirement while keep the merit plan incentives fair and even among all employees. To avoid unfair evaluations the OPM (The Office of Performance Management) has begun monitoring the rankings as well. This bonus compensations is proven that employees will have higher performance rates.

Conclusion

In a big company employing over 100 employees it is a main priority to attend to the needs of the employees. Adding compensation benefits is a great way to reward and show appreciation for the employees. With the addition of stock options this allows the employees to feel as if they are a bigger part of the organization. It also allows for employees to participate or not depending on their feelings towards being a shareholder of the company. Another great compensation benefit is to off tuition reimbursement which allows employees to extend their education at the price of the company. With guidelines this also allows for the company to benefit new knowledge in the workplace and a competitive advantage in the workplace environment. Many employees would not take advantage of an options without wanting to advance their careers in their current workplace. Lastly merit plans are also a positive to the company. This option is based off performance. With higher evaluation the employee has an increase in their base pay up to 15%. This method is also monitored closely by upper management and the OPM to allow fairness in the workplace.
After research and evaluation I do believe that stock options, tuition reimbursements, and merit plans will be a positive incentive in our company. With these additional compensation benefits the employees work performance will increase, making our company more competitive in the work environment. References

Barnes, Ryan. (2010, December 6). The Benefits and Value of Stock Options. Retrieved from http://www.investopedia.com/articles/optioninvestor/07/evolvingoptions.asp
Landis, Luke. (2012, July 20). Tuition Reimbursement: A Benefit for Some Employees and Employers. Retrieved from http://www.forbes.com/sites/moneybuilder/2012/07/20/tuition-reimbursement-a-benefit-for-some-employees-and-employers/
Milkovich, G.T., Newman, J.M., Gerhart, B. (2014). Performance Plan. Retrieved from http://answers.mheducation.com/business/management/compensation/pay-performance-plans
The National Center of Employee Ownership (NCEO). (2014). Employee Stock Option Facts Sheet. Retrieved from http://www.nceo.org/articles/employee-stock-options-factsheet
UCSF Human Resource. (2013, August 23). Guide to Managing Human Resource, Chapter 4: Compensation. Retrieved from http://ucsfhr.ucsf.edu/index.php/pubs/hrguidearticle/chapter-4-compensation/
US Office of Personal Management. (2014). Performance Management Reference Material. Retrieved from: https://www.opm.gov/policy-data-oversight/performance-management/reference-materials/more-topics/merit-system-principles-and-performance-management/
Vocus PRW Holding, LLC. (2010, December 9). Tuition Reimbursement Helps Companies Build a Stronger Workforce. Retrieved from http://www.prweb.com/releases/2010/12/prweb4878364.htm

Wyman, Rick. (2011, February 11). Should Employees Be Compensated With Stock Options? Retrieved from http://www.investopedia.com/articles/analyst/091202.asp