Rewarding and Incentive Schemes
Rewarding and Incentive schemes in general
Rewards are a part of management methods and systems. In an ideal situation, good work performance is rewarded. Rewards are part of the personnel strategy and rewarding should be followed systematically. Sensible rewarding supports the company’s strategy by fulfilling the company’s business as well as personnel strategy. Rewarding is often linked to performance evaluations.
Rewarding is a matter of the organization as well as the personnel. Rewards should not only be an expense of the organization, but contribute to improve its profits and achieve better results. Successful rewarding contributes to the profitability of the company by guiding the employees to improve their performance.
It is important to set clear grounds for rewarding. The underlying questions are: what is achieved and how to measure the results, how are things done and what is done. Indications of successful rewarding are good and diverse planning by various personnel groups, simplicity, attractiveness and effective communication e.g. in connection with development talks.
Rewards are generally divided into financial and non-financial rewards.
Financial rewards may be straightforward monetary rewards or indirect in the form of insurances and fringe benefits. Performance based rewarding may include share-based options, bonuses, personal allowances or merit pays. Employees can be rewarded both individually and as a group, in an appropriate ratio.
A form of rewarding is an incentive scheme. Incentive schemes should always be set out in writing as they are usually very detailed. Preparing the incentive scheme in writing also reduces the risk of disagreements in respect of the interpretation thereof. The incentive scheme is a binding agreement between the employer and employee. Incentive schemes and other performance based rewarding are not commonly regulated in detail in collective bargaining agreements, but are based on company-specific agreements, programs or schemes. Also for instance option programs and share issues to employees constitute incentive schemes. When considering such, company and tax law matters must be taken into consideration. For further information see Employment options
Non-financial rewarding methods are e.g. professional promotions and social rewards. An employee’s career may be a reward in itself for the employee, if the work is motivating and the employee feels that he/she is developing and furthering his/her career. Socially an employee may be rewarded by appraisals and acknowledgement, various status symbols and by seeking to create a strong social network between employees.
Employment options
Employment options are rights based on the employment relationships to receive or purchase shares of the company or another business entity by terms set beforehand. The subscription for option rights can be done either against payment or it can be free of charge
An option right is a right to subscribe for shares on specified conditions and at specific times.
An option loan is a (group) promissory note loan equipped with warrants that entitle to subscribe for the issuer’s shares. An option right is a right to subscribe for shares on specified conditions and at specific times. The Limited Liability Companies Act permits nowadays option arrangements, i.e. the issuance of an option right, also without the loan aspect. The option right may be linked to certain commitments, such as an obligation on the employee to work for a specified time for the company. Employment options often serve as incentives as well as a way of committing the employee to the company..
Employment options are regarded as the employee’s salary income.
For further information, see [6.1.2.4 Option Rights].