19 Non-Monetary Incentives

Learning Objectives

After completing this session, you will be able to:

  • describe Employee Stock Ownership Plans (ESOPs).

A. Employee Stock Ownership Plans (ESOPs)

A plan whereby employees gain stock ownership in the organization for which they work.

Establishing an ESOP

  • An organization establishes an ESOP by using its stock as collateral to borrow capital from a financial institution. Once the loan repayment begins through the use of company profits, a certain amount of stock is released and allocated to an employee stock ownership trust (ESOT).
  • Employees are assigned shares of company stock kept in the trust, based on length of service and pay level. On retirement, death, or separation from the organization, employees or their beneficiaries can sell the stock back to the trust or on the open market, if the stock is publicly traded.

Advantages and disadvantages of ESOPS :

Establishing an ESOP creates several advantages.

  • The major one is that the firm can receive favourable tax treatment of the earnings earmarked for use in the ESOP. Second, an ESOP gives employees a “piece of the action” so that they can share in the growth and profitability of their firm.
  • Almost everyone loves the concept of employee ownership as a kind of “people’s capitalism.” However, the sharing also can be a disadvantage because employees may feel “forced” to join, thus placing their financial future at greater risk. Both their wages or salaries and their retirement benefits depend on the performance of the organization.
  • This concentration is even riskier for retirees because the value of pension fund assets also depends on how well the company does. Another drawback is that ESOPs have been used as a management tool to fend off unfriendly takeover attempts.
  • Holders of employee-owned stock often align with management to turn down bids that would benefit outside stockholders but would replace management and restructure operations.


The object of the Payment of Bonus Act, 1965 is to provide for the payment of bonus to the persons employed in certain establishments on the basis of profits or on the basis of .

  • The Payment of Bonus Act, 1965 is the principal act for the payment of bonus to the employees which was formed with an objective for rewarding employees for their good work for the organization.

It is a step forward to share the prosperity of the establishment reflected by the profits earned by the contributions made by capital, management and labour with the employees.


The Act applies to :

  • Every Establishment in which 20 or more persons are employed on any day during an accounting year
  • If less than 20, then this act can be applied by ‘Appropriate Government’ by way of notification in the official gazette
  • Once the Payment of Bonus Act 1956 is applicable, then its ‘Forever Applicable’ even the number of persons falls below 20.
  • Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty (30) working days in that year.
  • The maximum bonus including productivity linked bonus that can be paid in any accounting year shall not exceed 20% of the salary/wage of an employee under the section 31 A of the Act
  • Applicable on wage slab 10,000 per month who has worked for not less than 30 days in an accounting year, shall be eligible for bonus for minimum of 8.33% of the salary/wages even if there is loss in the establishment whereas a maximum of 20% of the employee’s salary/wages is payable as bonus in an accounting year.


Employees will become eligible for payment of Gratuity only after termination of his employment on completion of 5 continuous years in service

  • Employees will become eligible for payment of Gratuity only after termination of his employment on completion of 5 continuous years in service, according to the Code on Social Security 2019 introduced in Lok Sabha. The code on social security will come into effect only after it is passed by both Houses of Parliament and receives Presidential assent.
  • Chapter V of the Code says, “Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years…”
  • The Act states that if an employee’s services are terminated due to any act, willful omission or negligence causing damage or loss to or destruction of property of the employer, the employee’s gratuity shall be forfeited to the extent of damage or loss
  • It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26. This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit
  • The retirement gratuity payable is 16 times the basic pay subject to maximum of Rs 20 lakh. In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh.


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