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CHAPTER QUESTION 6: WHAT ARE THE BENEFITS OF OFFERING PROFIT
SHARING AND STOCK OPTIONS, AND CREATING AN EMPLOYEE STOCK
OWERSHIP PLAN AND COOPERATIVES? DESCRIBE EACH OF THESE
TECHNIQUES FOR EMPOWERING EMPLOYEES.
PROFIT SHARING
oProviding employees with a share of company profits is also very ethical, motivating, and
empowering.
oResearchers report that profit sharing has positive impacts on employee cooperation,
turnover, productivity, costs, and profits.
oProfit sharing also positively impacts organizational commitment, a research finding in
all sizes of firms, although strongest in small firms.
oProfit sharing supplements, but does not replace, base pay.
oEmployees earn wages based on skills and labor market conditions, and then participate
in the distribution of profits generated by their work efforts.
oProfit-sharing companies set aside a percentage of profits beyond a targeted amount into
a bonus pool.
oSome companies distribute profits as a percentage of compensation, under the
assumption that higher-paid employees contribute more to the financial outcome.
oOther companies create a multifactor calculation that allows for bonus
fluctuations based on team and individual accomplishments.
oProfits are distributed in cash or stock at the end of the fiscal year, or as deferred
compensation. The deferred compensation is not taxed until accessed by the employee,
usually upon retirement, death, disability, or employment termination.
oEmployees can borrow money against their profit sharing account.
oAccording to the Employee Retirement Security Act (ERISA), employer contributions
cannot exceed an average of 15 percent of an employee’s salary during any two-year
period.
oEmployers can deduct profit sharing as a business expense.
oProfit-sharing plans enhance organizational loyalty by spreading out the length of time
required for an employee to have full access to the funds.
oTypically, an employee is fully vested after three to six years.
oIf an employee leaves the organization prior to being fully vested, the amount
remaining in the employee’s profit sharing account is redistributed to the other
plan participants.
STOCK OPTION PLAN
oAccording to the 2006 General Social Survey, 20 million American workers own stock in
their company through a 401(k) plan, ESOP, direct stock grant, or similar plan, and 10.6
million hold stock options.
oStock options, historically reserved for executives, are now offered by many public and
private companies to all employees. More than 10,000 Microsoft employees have become
millionaires through the company’s stock option plan.
oStock options give an employee the right to purchase a specific number of company
shares at a fixed price by a particular future date, typically 10 years.
oThe number of stock options an employee receives is based on a formula, usually
determined as percentage of compensation to total payroll and performance
accomplishments.
oEmployees earning higher pay, who are more accountable for profitability, have
access to, and can afford to purchase, more stock options.
oEmployees often have full vesting rights after three to five years, and are taxed on
the profits earned when they option to buy and sell their stock.
PHANTOM STOCK
oSome privately-held companies, whose stocks are not sold on the open market, offer
employees phantom stock.
oThe phantom stock value of privately owned companies is annually determined by an
independent appraiser.
oPhantom stock can also be issued by publicly held companies that do not want to dilute
the ownership rights of existing shareholders.
oSimilar to stock options, phantom stock has a specified expiration date and can be
structured in different ways.
oMany companies use the phantom stock as an employee bonus linked to firm
profitability.
oEmployees earn a cash bonus equal to the increase in the phantom stock’s value between
the day issued and the day exercised.
EMPLOYEE STOCK PURCHASE PLAN
oAn employee stock purchase plan is slightly different from a stock option plan.
oUnder an employee stock purchase plan, employees request to have deductions taken out
of their pay and put into an account to purchase stock at a discount, usually 15 percent,
by a specified date.
oSome companies will match a certain percentage of the employee deduction. If an
employee decides to not purchase the company’s stock by the expiration date, the
employee gets his or her pay deductions back.
EMPLOYEE STOCK OPTION PLANS (ESOPs)
oEmployee Stock Option Plans (ESOPs) take stock options one step further in
empowering employees. The company gives all full-time employees over the age of 21 a
significant equity stake in the company.
oUnlike stock option plans, all full-time employees must be included as ESOP members.
oIn 2008, approximately 11,500 ESOPs, most of them corporations, covered 10 million
employees.
oMost ESOPs have less than 1,000 employees. The one hundred largest ESOPs range from
1,070 to 144,000 employees, and include supermarkets, manufacturers, engineering, tree
service, construction, motels, nursing homes, and drug stores.
oAlthough all full-time employees must be included to create an ESOP, an ESOP does not
necessarily control the entire company.
oThe average ESOP owns only 6 percent of a company’s equity.
oThe United Airlines ESOP was granted equity shares accounting for 55 percent of
the firm’s cash flow rights.
oESOPs are complex financial vehicles requiring legal assistance. ESOPs cost about
$50,000 to $100,000 to set up and operate the first year, with annual maintenance fees
ranging from $15,000 to $30,000 for firms with less than a few hundred employees.
oThe initial legal costs may seem high, but it is typically equivalent to, or less than,
what an owner would pay a broker to sell the business.
oOwners usually consider creating an ESOP when a change of ownership is being
explored. Rather than selling the company to an outsider, the owner can sell the company
to employees.
oTo create an ESOP, the company borrows money from a bank to purchase company stock
which is then placed into a trust fund.
oThe loan interest is tax deductable and paid off through dividends. Loan principal
payments are deductable up to 25 percent of payroll.
oEmployees do not purchase the company, the trust fund does. The stocks are then
allocated into employee accounts according to a specific formula, typically based on
compensation and seniority.
oThe company makes annual tax-deductible contributions into the fund to purchase stock
employees sell back to the company.
oMost of the money in the trust fund must be invested in company operations.
oThe value of employee stock is independently appraised on an annual basis.
oThe value of the stock increase is tax deferred until sold.
oESOPs provide employees with a right to purchase the stock, but employees are not
obligated to do so.
oEmployees can purchase their vested shares when they leave the organization—quit, are
fired, retire, or die—and must sell the stock back to the company or other employees
within one year at the appraised value.
oEmployees can vote their ESOP shares on major issues.
oESOPs are governed by a board of directors that employs professional managers. In
publicly held companies, ESOP participants have the same rights as other stockholders.
COOPERATIVES
oProducer, consumer, and employee cooperatives are an alternative communal way to
govern a business and raise capital.
oIn a producer cooperative, such as an agricultural cooperative, producers pool
their capital and resources for their mutual benefit.
oConsumer cooperatives are businesses owned by customers for their mutual
benefit, such as credit unions and healthcare cooperatives.
oIn both circumstances, profits are either reinvested in the cooperative or
distributed among the owners (producers or consumers).
oEmployee cooperatives are organizations owned by the employees and
democratically governed—one vote per employee-owner. Employee cooperatives
can be found in a wide range of industries and organizations, including
agriculture, banks, food stores, coffee, home health care, technology, and poultry.
Each employee-owned cooperative creates its own unique rules.
In some cooperatives, the employee-owners vote on board members,
managers, capital investments, wages, and company policies.
Large cooperatives tend to elect a board of directors that determines major
strategic issues and hires managers. Profits are reinvested in the
organization, set aside in reserves, or distributed to the employee-owners
based on an agreed-upon formula.
DISCUSSION ACTIVITY
Ask students if they were a CEO, would they limit profit sharing plans to executives or make
available to all employees. Discuss the pros and cons of both possibilities.
CHAPTER 10 CHAPTER AND ADDITIONAL QUESTIONS SUMMARY
Chapter Question 1: How can managers organize work so employees are more engaged
with job tasks and organizational goals?
Employee engagement is an emotional bond or attachment an employee has to the work
What do people want in a job? Of course people want a good salary and job security –
But is that all they want? No. Many other factors matter to employees. Also chosen as “very
important” by survey respondents were:
Developmental psychologist Abraham Maslow differentiated five categories of needs every
individual has: physiological, safety, social, self-esteem, and self-actualization.
FOR DISCUSSION: Have students independently distribute 100 points based on how important
each of the 5 needs in Maslow’s hierarchy is to their lives and their parents. Which of the 5 needs
The work of David McClelland complements Maslow’s hierarchy of needs.
McClelland emphasizes three human needs: a need for affiliation, a need for achievement,
FOR DISCUSSION: Have students rate themselves and their parents as high, moderate, or low
for each of McClelland’s three needs, the need for (1) affiliation, (2) achievement, and (3)
power/authority. Explain why each need was rated high, moderate, or low. Do they have the
same needs as their parents? Next, have students rate their current or last job, or their parents’
job, as high, moderate, or low for each of McClelland’s three needs, the need for (1) affiliation,
(2) achievement, and (3) power/authority. Explain why each need was rated high, moderate, or
low at the workplace? Does the workplace need profile fit their own need profile? Do the same
for the student’s parents. Discuss in small groups.
The work of Frederick Herzberg, based on interviews with accountants and engineers,
concluded that job satisfaction is not a linear concept where the presence of some factors
oJob satisfaction factors, which he called “motivation factors,” are related to what
people do at work. These include achievement, recognition, work itself (doing a
oJob dissatisfaction factors, which he called “hygiene factors,” are related to a bad
working environment. These include company policies and administration, quality
FOR DISCUSSION: Have students rate their current or previous job, or organization
membership, as high, moderate, or low for each of the 12 motivation and hygiene factors in
Exhibit 10.2 “Herzberg’s Job Satisfaction-Dissatisfaction Theory” for their current or previous
job. 1. Explain why each motivation factor was rated high, moderate, or low. How did the factor
impact your job satisfaction? 2. Explain why each hygiene factor was rated high, moderate, or
low. How did the factor impact your job dissatisfaction?
Employee engagement is more likely when employees perceive justice, or fairness, in
Organizational justice is multidimensional. Scholars distinguish among four forms of
organizational justice – procedural, informational, interactional, and distributive justice:
FOR DISCUSSION: Have students rate a current or previous employer, or organization
membership, as high, moderate, or low for each of the 4 organizational justice dimensions:
procedural, informational, interactional, and distributive justice. Then answer the questions
below and discuss in small groups
1. Which dimension was a strength (high rating)? Provide real-life example.
2. Which dimension was a weakness (low rating)? Provide real-life example.
3. What would management need to do to transform the lowest score item into a strength?
Unethical bullies create a range of injustices at work. Employees usually cannot perform at
Bullying is defined as repeated verbal abuse or abusive conduct that is threatening,
Bullying can take many forms, including hostile and insulting remarks about appearance or
Bullying has many negative impacts on overall organizational performance: low levels of job
satisfaction, organizational commitment, and morale; high levels of absenteeism,
psychological distress, and turnover; lead to illegal forms of harassment and discrimination,
FOR DISCUSSION: Have students think back to grade school and high school. How did they
respond to an unethical bully in the neighborhood, on the school bus or playground, or in class?
Why? What were the negative impacts of the unethical bully’s behaviors on you and others?
According to Lips-Wiersma and Morris (Exhibit 10.3 “Sources of Meaningful Work”) , four
FOR DISCUSSION: Have students plot an “X” on each axis in Exhibit 10.3 “Sources of
Meaningful Work” for their current or previous job task, or organization membership. First, did
the job entail students serving the need of others (“others) or their own needs (“self”)? Second,
did the job entail students spending most of their time in continual action (“doing) or did it allow
time for reflection (“being)? Which of the four sources of meaning are embraced by the two
“X”s: (1) unity with others, (2) service to others, (3) expressing full potential, or (4) developing
and become self? What could managers do to make your job task more meaningful? Discuss in
small groups.
According to the most talented employees, an excellent manager:
Gallup Organization researchers found that pay is not among the most important motivational
factors contributing to employee engagement and productivity.
Review EXHIBIT 10.4 “12 Core Elements of Employee Engagement,” which provides 12
core elements that must be experienced at work to attract, engage, and retain talented
employees.
FOR DISCUSSION: Have students complete the “12 Core Elements of Employee Engagement”
survey in Exhibit 10.4 for a current or previous job, or organization membership. What were the
engagement strengths? What were the engagement weaknesses? What would management need
to do to transform the lowest score item into a strength? Discuss the results in small groups
Chapter Question 2: Describe different techniques for managing go-getters, fence-sitters,
and adversarials.
oEmpowerment refers to giving employees decision making authority, which can be further
FOR DISCUSSION: Have students estimate the percentage of employees they knew at their
current or previous job, or organization membership, that were (a) go-getters, (b) fence-sitters,
and (3) adversarial. Did managers do anything special for go-getters so that the go-getters felt
appreciated? How were adversarial employees managed? How would you have managed the
adversarial employee? Why?
oReview the wide range of management behaviors that can foster employee empowerment,
FOR DISCUSSION: Have students complete the “Empowering Behaviors Survey” in Exhibit
10.6 for a current or previous supervisor, or organization membership leader. What were the
supervisor’s strengths? What were the supervisor’s weaknesses? What would the supervisor need
to do to transform the lowest score item into a strength? Discuss the results in small groups.
Chapter Question 3: What is the team problem-solving process? What are its advantages?
oAccording to Patrick Lencioni, ineffective teams suffer from five dysfunctions: absence of
oConversely, the most effective teams consist of members who:
oThe “pinch theory” technique is a useful tool for preventing team conflicts from escalating.
oThe team problem-solving process below helps access each member’s unique knowledge—
introverts as well as extroverts—and generate solutions with the highest likelihood of
achieving superior performance.
FOR DISCUSSION: Have students experience the problem-solving process by focusing on an
experience they have shared, such as this class. The problem statement can be: Every class is
imperfect and in need of continuous improvement. How can the professor improve this class?
Then direct the students through the remaining 7-step problem-solving process: individually list
solutions to improve the class, share solutions in small group, brainstorm other possible
solutions, group and prioritize the solutions, someone play’s devil’s advocate, and then more
fully develop the solution to share with the professor in terms of potential implementation.
oOrganize daily end of the day reflections where each employee shares the following
Additional Question 1: What is Open Book Management
oOpen Book Management is a technique where managers share relevant financial and
oReview the TIPS AND TECHNIQUES “Open Book Management” exhibit
FOR DISCUSSION: Would open book management work in your current or previous place of
employment, or organization membership? Why? How would other employees react to this
opportunity?
Chapter Question 4: How would you design an Appreciative Inquiry workshop to achieve
superior customer service?
oAppreciative Inquiry is a team-based management technique that focuses on the strengths
of both the employee and organization.
oAppreciative Inquiry is a four phase process, employees:
oAn Appreciative Inquiry workshop can be designed to empower employees to achieve
superior customer service based on organizational strengths.
FOR DISCUSSION: Have students experience an Appreciative Inquiry workshop based on
improving customer service for an organization they share in common, such as the college or
School of Business. Begin by having students independently answer the questions and then
follow the 8-step Appreciative Inquiry workshop format.
Chapter Question 5: Describe how to implement a Scanlon-type gainsharing plan.
oScanlon-type gainsharing plans empower employees by delegating institutional
FOR DISCUSSION: Have students design a gainsharing plan for the college, Business School or
employer to reduce energy consumption. As part of the plan, include answers to the following
questions: (1) Who should be the gainsharing coordinator? (2) How would you set up the
suggestion system? (3) Who should be put on gainsharing teams (everyone or representatives)?
(4) Who should be on the Review Board? (5) How should the group-based financial bonus be
constructed?
Chapter Question 6: What are the benefits of offering profit sharing and stock options, and
creating an Employee Stock Ownership Plan and cooperatives? Describe each of these
techniques for empowering employees.
