Organizational Incentive Programs: Profit Sharing, Gain Sharing, and Employee Stock Ownership

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  • 0:02 Performance Incentives
  • 1:07 Stock Options
  • 2:07 Profit Sharing
  • 2:36 Gain Sharing
  • 3:31 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

One way to tie a company's success to employee success is to utilize incentive programs where employees profit when the company does. In this lesson, you'll learn about profit sharing, gain sharing and employee stock ownership.

Performance Incentives

Carl has just started a new software company. Carl believes he's hired a great team, but he's overheard some of them griping about the low pay. He knows the compensation he can afford is not great given his shoestring budget. He also knows that he has to find a way to convince his team to go the extra mile and get their new software platform off the ground as soon as possible.

Carl gives his friend Frank a call. Frank works in human resources for a successful startup. Carl invites Frank for a cup of java in hopes of picking his brain for a solution to his dilemma. After ordering, Carl explains his problem.

Frank completely understands as his company went through the same thing. He suggests that Carl consider adding some performance incentives to his company's compensation system. Frank tells Carl that the idea is to align the interest of his company and its shareholders with the interests of his employees. You can do this by offering to compensate employees based on the success of the company. If the company is successful, then the employees are rewarded. Carl is interested and asks for some options.

Stock Options

Frank explains that one approach is to grant stock options to his employees. An employee stock option is a contractual right that entitles an employee to purchase shares of the company's stock at a set price sometime in the future. Employees must hold the stock options for a specific period of time before exercising them, which is called the vesting period. The more successful the company becomes, the more valuable the stock options will tend to be. Carl asks how, and Frank gives an example.

Let's say that Ed, the employee, is granted the option to purchase 1,000 shares of a company's stock at $10 a share, which is the price per share at the time the option was granted. Ed works hard to make the company a success, and by the time Ed has the right to exercise the options, the company stock is trading at $15 a share. Ed gets to buy up to $15,000 of stock for only $10,000.

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