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Weighing the Benefits of Alternative Rewards with Potential Payroll Costs

Published on 8/26/2016 12:00:00 AM
Alternative employee rewards and recognition strategies can boost staff engagement, but may cause certain payroll issues.

To keep employees engaged and reward them for superior work, more and more employers are doling out alternative compensation. These incident-based rewards, which may include referral, sign-on, spot or retention bonuses, can put some extra cash in employees’ pockets while also building a stronger connection to your company.

Are these types of awards a good idea for your business? And if so, what do you need to consider to handle them correctly and avoid complications?

A rise in employee rewards programs

According to a July 2016 survey report from WorldatWork, the percentage of organizations providing incidental bonuses has risen steadily since 2010. Specifically:

Referral – 60% in 2010 => 76% in 2016
What it is: Cash award to a current employee for referring a job applicant who is hired

Sign-on – 54% in 2010 => 65% in 2016
What it is: Cash bonus granted at the start of a service period, usually for accepting an employment offer

Spot – 43% in 2010 => 61% in 2016
What it is: Cash award as a form of informal staff recognition, often delivered “on the spot”

Retention – 25% in 2010 => 55% in 2016
What it is: Cash bonus tied to length of service or another milestone

The WorldatWork survey revealed some other interesting trends surrounding bonuses. Approximately 32 percent of organizations use all four types of bonuses, and 55 percent budget for spot bonus programs. Further, sign-on and retention bonuses are more common in larger organizations than small businesses (fewer than 100 employees).

And here’s the really good news: More than 60 percent of respondents indicated that these programs help employee engagement, motivation and satisfaction.

Don’t forget about the FLSA

If you’re considering granting one or more of these alternative bonuses to your employees, you need to be aware of a few legal matters. Like all issues regarding pay, the Fair Labor Standards Act (FLSA) may come into play.

For example, depending on the type of bonus, you must include the amount in an employee’s regular rate of pay when calculating overtime. Nondiscretionary bonuses affect the rate of pay, though discretionary bonuses do not.

What’s the difference? A nondiscretionary bonus is one employees expect for one reason or other, and are typically tied to productivity, profitability or other predetermined goals.

A bonus is discretionary, on the other hand, if the employer has decision-making authority over the timing and amount of the reward. In other words, it’s a surprise to employees and isn’t connected to a workplace promise or policy.

Based on these criteria, referral, sign-on and retention bonuses would be considered nondiscretionary. Therefore, under federal law, employers must calculate overtime pay according to the hourly rate plus any bonuses. The calculations can be quite tricky, so it’s best to visit the DOL’s website for guidance. You’ll need to be certain you (or your payroll provider) understand the calculations to ensure compliance with the FLSA and to avoid penalties.

Bottom line: Though it certainly makes sense to explore bonuses as a competitive advantage and to reward and retain deserving employees, you must weigh the potential effect on your company’s budget and overtime costs. Only then can you determine which bonus plans are right for your business.

Success Tips for Top 3 Types of Alternative Rewards

Referral bonuses
Develop a policy to clarify if bonuses apply for every job, or only certain positions; and if they’re ongoing, or only at specific hiring times
Determine a payout schedule, whether it’s a partial payment at the time of hire and the rest after a probationary period (usually 3-6 months), or the entire bonus at the end of a probationary period
Explore paying higher referral bonuses for candidates who become high performers, or for candidates needed for hard-to-fill positions
Sign-on bonuses
Make these bonuses a priority if they’re standard in your industry, such as with IT employees, if you need to attract a candidate with hard-to-find skills or you’d like to entice a candidate to move from another state
Stagger signing bonuses to prevent candidates from job-hopping, such as paying half the bonus at signing and the rest after the employee has worked a year
Consider a “clawback” provision where employees must return a percentage of the bonus if they quit before year’s end
Spot bonuses
Create different award levels, such as a $25 gift card for enthusiasm at a company trade show to $500 for leading and completing a complex project
Set an annual budget, and don’t feel obligated to use it if y​ou don’t identify deserving employees
Make these bonuses count by rewarding exceptional behavior and not merely “doing the job”
Keep them a surprise so employees don’t expect them, which can help increase motivation
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