The three types of Compensation and Benefits

Compensation and Benefits comes in many different forms. The major goal for compensation and benefits is to reward employees for services provided by an individual for the benefit of the organization. It’s a set of programs, aiming to achieve and attract capable workers to a particular business. Compensation and benefits also helps motivate employees towards superior performance and retaining these services for a long period of time. There is a wide range of different types of compensation and other benefits.

This paper will focus on three of many, Share based compensation to include stock options and restricted stock, Base Compensation and Pension Plans. Throughout this research project; there will be observance of the accounting treatments and disclosures along with the benefits, advantages and disadvantages to employees, share holders and investors. This will allow and develop a better understanding as to why compensation and other benefits are so important to employers, employees and shareholders. There are two types of common shard based compensations restricted stock and stock options.

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Stock options give shareholders the right to exchange shares at prearranged prices before the dates of the stocks expire. Most of the times there is a vesting period which usually lets an employee know when they can exercise their options and how much is available to vest.

Share based compensation must take into account and apply applicable laws when it comes to the accounting process. It’s up to senior management and executives to disclose security registration and regulatory disclosures to the appropriate agencies.

Securities transactions must be disclosed and trading of shares is granted at specific times in a quarter. Like with the majority of things, there are advantages and disadvantages to share based compensation. The benefit and advantage to management and employees is that they can share in the growth of the company’s stock prices, if structured properly these stock options can support shareholder and employees interest without touching the company’s cash reserve. Most employees working for lower salaries intend on cashing in later when stock prices increase. Restricted stock is less dilutive than stock options but provide the same advantage for stock appreciation. Stock options have very little risk for employees but can have long term consequences for shareholders if risk taking behavior influence share prices, which can be a disadvantage. Next we will observe regular base compensation, though it sounds quite like share base compensation they are different. Share based compensation can be considered an option regular base is a guarantee.

Regular base compensation is in regard to wages or salaries as payment to an employee in return for their contribution to the organization. Organizations usually associate compensation with a job description and monies is earned per year according to the roles, experiences and longevity. When it comes to accounting requirements and disclosures there is not too many details or procedures to follow. This type of compensation is totally an advantage to an employee; unless you were to lose your job then this would be considered a disadvantage.

Lastly, we will observe the Pension Plan and its accounting requirement, advantages, disadvantages and disclosures. Pension plans often enhance conductivity, reduce turnover, satisfy union demands and allow employers to compete in the labor market. This type of compensation is designed to provide income during retirement. There are two different types of plans, defined benefit pension or defined contribution pension plans. Both plans have advantages, disadvantages, accounting policies and disclosures are applicable. It is a requirement of management to prepare pension statements according to the Statement of Recommended Practices (SORP). The accounting policies should be clearly explained in the notes for each material item and include accruals, expenditures, investment income, benefits and payments. Consistency of accounting treatment between periods is a fundamental accounting concept and changes should not be made unless justifiable and disclosed with a reason. The notes disclosed should be in relation to the investment at market value to include profits, deposits and equities to name a few.

The advantages and disadvantage can differ depending on which plan the employee choose. The defined benefit plan is simple; funds are calculated based on years of service, annual compensation and age. With this plan you don’t have to worry about investing money or market price fluctuations. The benefit plan gives a sense of ease that your benefit will remain unchanged because it is at set rate during retirement. Everything is based on calculations and the company is responsible for assuring that benefits are distributed to the retiree; that within itself is an advantage. The only disadvantage in using this plan is the lack of control. Since the amount is based on calculation your retirement amount could appear much smaller versus having the define contribution plan, your retirement could be much larger if you invest the maximum amount and choose the right investments. The define contribution plan is much riskier and may be a disadvantage to an individual that’s not interested in investing. Unlike the define benefit plan the contribution plan has control. You decide how much you want to set aside for your retirement and what type of investments your monies are placed into. This type of plan is also portable, so if you move to another company, become self-employed or unemployed you can obtain your money by rolling it over into another plan such as an IRA.

The major disadvantage of the contribution plan is it doesn’t offer guaranteed money for retirement because funds are depending on the performance of the stock market. In times like we were facing just few years ago you would have seen a drastic drops in the value of your retirement funds when it come to investing in the market. The main concept of compensations and benefits is to follow the principle that, employees find rewards in different forms. Many more companies are looking beyond the basic compensation and benefits to keep their employers and shareholders interested in staying with the organization. The importance of each element is balance according to the need of the company to attract and retain new candidates for a long period of time. Rather it’s having stock options available to employees or high-quality pension plans when ready to retire. The key is to understand the accounting procedures, advantage and disadvantages of the certain benefits; allowing us to be prepared when time approaches and decisions need to be made when using these particular benefits.

References:
Ricci, Ignacio (June 9, 2011) Human Resource Management 3 types of compensation benefits. Business Review Word Press. Retrieved February 18, 2014, from http://athanne.wordpress.com/2011/06/09/human-resource-management-3-types-of- Spiceland, J. D., Sepe, J. F., & Nelson, M. W. (2013). Intermediate Accounting (7th ed.). New York, NY: McGraw-Hill Education Moran, A. E. (2002). Stock Option Fundamentals. Employee Relations Law Journal, 28(2), 115-130. Terri Jarvis (January 2005) Accounting for Pension Schemes, Tottel Accounting Digest; Issue 27 page 14-16 Bruce Brumberg (2001) Stock Options “getting your share of the action: negotiating shares and terms in incentive and nonqualified plans”.