Sweat Equity


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Sweat Equity:
The management sometimes offers the shares to the employees which enables the company to create goodwill amongst the employees. This enables the company to maintain industrial peace rather than to be used as a method of raising finance. Under this method the company offers new securities to its employees. Through such a sale the workers become shareholders i.e. co-owners of the company. In this way co-partnership can be introduced through such a sale, by making workers the shareholders of the company. The company’s shares are offered at concessional rates to their workers. Worker’s share in the company’s profits are paid in the form of equity shares by which they become entitled to participate in the decision making process.
Steps in Implementation of a Stock Option Scheme:

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1.      Secure approval from the Board of Directors regarding the proposed stock option scheme.
2.      Fixing of the quantum of shares to be allotted to the employees through the stock option scheme.
3.      Determining the form of allotment. In case of:
a.      Listed Companies – by way of preferential issue or by dilution of the promoters’ holdings.
b.      Unlisted Companies – by issuing shares in the companies.4.      Determination of the allotment price as per SEBI guidelines, if applicable.
5.      Determination of the instrument whether stock, warrants, convertible debentures, etc. if any.
6.      Identification of the recipient employees for the proposed stock option scheme, whether all employees or only for chosen groups or for high-performers.
7.      After identifying the recipient employees, criteria has to be formulated for allocation to each such chosen groups based on performance, length of service, grade etc.
8.      Determination of the length of the lock-in-period, if any, during which the employees will not be allowed to sell the shares received through stock option plans.
9.      Dissemination of the information regarding the mechanism of stock options plan.
10.  Settlement of the dues as each option is exercised by the employees.

Advantages:
1.      Helps the company to maintain harmonious labour-management relations.
2.      Workers become more loyal towards the company.
3.      Introduces the labour participation in management as employees are given a voice in the management.
4.      Employees are given higher status since they become the shareholders of the company.
5.      Helps to improve productivity and to reduce costs because workers have a stake in the profitability of the enterprise.
6.      Creates a sense of belonging and responsibility among the workers and they co-operate voluntarily in productivity improvement programmes.
7.      It is a step towards industrial democracy because workers are treated as partners in industry rather than as mere wage earners.
8.      Workers get an opportunity to participate in the management of the enterprise.
9.      Employees become more loyal and committed to the enterprise since their future is linked with the company’s future.
10.  Workers get an opportunity to share both profits and control of the company.
11.  Workers get both the salary plus dividend on their shares.
12.  Links compensation package closely to performance
13.  Enables the companies to retain efficient employees.
14.  Encourages the employees to work even better.
15.  Inculcates a sense of ownership and responsibility.
16.  When the market price of the share increases the employees earn confidence in the company’s abilities.
Limitations:
1.      Employees may not respond favourably.
2.      The management has to offer the securities at a lower rate than the market price.
3.      The morale of the employees gets affected if they receive the dividends at lower rates.
4.      Trade union leaders will strongly oppose such a move because it affects the loyalty of the workers towards the union.
5.      The reward is so remote that its motivational effect is lost since the share in profits paid at long intervals after the final accounts of the company are prepared.
6.      The determination of profits and its distribution may because the root cause of dispute between the employer and employees thereby defeating the very purpose of profit sharing.
7.      Unscrupulous employers may manipulate the accounts through window-dressing to avoid sharing profits with workers.
8.      Employees in general dislike this idea because they prefer to be wage earners rather than becoming owners.
9.      Workers prefer bonus in cash rather than in the form of company’s shares.
10.  Since the share of workers in the company’s total share capital is too small therefore workers have a very limited voting power.
11.  It is possible only in the case of companies since only the company form of business can have share capital, whereas in other types of business firms it is not applicable.
12.  A fall in share prices may cause a loss to the employees.
13.  Stock option plans may increase administrative costs for the company.
14.  Unsound stock market conditions cause inconvenience to employees in encashing their investment.
15.  Can be used successfully by only the profit-making companies.
Corporate Example:
1.      Employees of Computer firms like Infosys Technologies have become millionaires through stock options.

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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to contact@bms.co.in.

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