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The decline in profitability of Oxford Health Plans Inc. Company representing a loss of $291.3 million coupled with the plunge in the stock price of its shares of up to 80% drop, necessitated changes to improve the company’s financial status. The events arose because of the company’s weak internal financial systems.
The company took steps among them, shakeup of its top management and pay cuts with the Ex-CEO getting a 61% pay cut. The company also sought financial bailout to the tune of $700 million to stabilize its financial position. The company also employed motivation to retain its employees through incentives involving share allocation at lower prices.
Winslow, the author of the article holds the opinion that despite all these measures, the financial status of the company is not likely to improve.
He further argues that the incentive plan of awarding employees shares at lower prices may not be effective, as the value of the shares is not projected to increase and the company’s rating is at its lowest; B-minus as per Standard &Poor. He blames the financial difficulties faced by the company on poor financial systems used by the company
However, due to the restructuring and down sizing, more revenue will be generated and costs reduced. The financial loans will help the company to return to solvency.
Already the company shares have shown signs of increase in value and the proposed junk bond offerings of $350 million will contribute to improvement of financial status of the company. The incentives to employees will serve to motivate them and lead to a raise in volume output.
The company must balance between cost reduction and the retention of talented employees. In the Oxford Health Plans Inc. Company, the management sought to increase cuts in the bonuses of top executives (Winslow, 1998, p.B8). Most of these executives did not get any bonuses because of the losses incurred by the company. Outsourcing is another strategy that is useful in cost cutting.
A new management team to replace the current team with less pay package is useful in cost cutting like in the case of Oxford Health Plans company, the ex-CEO, Wiggins was paid more than the expected pay of the new CEO, Norman D. Payson. On the other hand, employees’ retention through share allocations acted as an incentive.
Employee Retention and Work Incentives
Good business management requires the productivity of the staff to increase over time. This is achieved through motivation and incentives awarded to the work force to increase output and increase staff retention (Baye, 2008, p. 58). The decline of profitability of a company would encourage employees seeking better work elsewhere.
The management of Oxford Health Plans Company avoided loss of employees by facilitating employee ownership of the company through shares. The filing notes granted by the company to employees at an effective price of $17.25 a share, aimed at motivating the employees and giving them job security.
The Oxford Health Plans company, as a way of motivating the employees also used the bonus allocation. The bonus plan should provide for compensation for the extra efforts of an employee (Baye, 2008, p.62).
The executive vice president, Jeffrey H. Boyd based on an objective evaluation by the compensation committee, received a bonus of $250000 to compensate for his efforts and contributions to the company. However, this bonus plans were inappropriate because the financial performance of the company was low.
To stabilize the financial status of a company during times of low performance, a company might seek external sources of funding in form of secured and unsecured loans. The company can also seek internal funding like allowing the employees to invest in the company through shares.
In the Oxford Health Plans company, the company resorted to tackling the poor performance through the board and hiring of new management team. The company also planned to issue junk-bond offering of $350 million to enable it to overcome the financial crisis.
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The Oxford Health Plans company resorted to pay cuts of its top executives because of dwindling profits and rewarded employees for extra efforts.
Despite the poor performance of its shares in the stock market, the strategies involving staff motivation and cost cutting increased the prospects of the company making a financial turnaround. Thus, it is apparent that among other strategies, incentives and work bonuses are important to achieve high productivity of a company.
Baye, M. (2008). Managerial Economics and Business Strategy. New York: McGraw Hill. Print.
Winslow, R. (1998). Wiggins, Ex-CEO of Oxford Health, Took 61% Cut in Total Pay Last Year. The Wall Street Journal, B8.