Over 2/3 of Local Employers Still Offer Incentives/Bonuses

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The results of the 2011 ERC Pay Adjustment & Incentive Practices Survey show that the majority of employers are still offering an incentive/bonus plan. However, the percentage is down from the past few years.  

The survey reports that 67% of organizations surveyed have an incentive/bonus plan, compared to 79% in 2010 and 89% in 2007. Although this is the lowest percent reported in years, it’s important to note that the majority of respondents continue to offer an incentive/bonus plan.

The survey also shows that incentives including annual bonuses, profit sharing, spot-achievement awards, and individual incentives remain the most common incentives offered by employers. Gain-sharing, small-group incentive pay, and stock options continue to be less common.

Additional Resources
More info about this survey and other compensation surveys: click here

10 Ways to Manage Pay & Performance

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10 Ways to Manage Pay & Performance

Most employees want the opportunity to earn more pay based on performance, but such initiatives can be difficult for employers to create and administer. Here are 10 things to consider when managing pay and performance.

1. Does your culture align with a pay for performance program?

To be effective, your organization’s culture should align with a pay for performance program. This means that your organization should be committed to rewarding, recognizing, and promoting top performance, and employees should be aware of this commitment. It’s also important that your culture conveys an atmosphere of fairness and objectivity. Otherwise, pay for performance programs will fall prey to perceptions of subjectivity and bias, limiting their effectiveness.

2. What are the goals of the pay for performance program?

A pay for performance program can have many types of goals such as to improve productivity; increase customer satisfaction; enhance product quality; generate more innovation; boost revenues and profits; or reward top performers. Most goals for a pay for performance program focus on improving individual, team, and/or organizational performance. Be sure that the goals of this program are relevant to the business’s goals and needs.

3. What types of performance criteria will be rewarded?

The goals you define for the pay for performance program help determine what types of performance criteria will be rewarded. For example, if your goal is to increase customer satisfaction, the performance criteria may be customer satisfaction scores, number of customer complaints, or general customer feedback. If your goal is to improve productivity, the performance criteria might be quantity of products created, number of processes streamlined, or behaviors that enhance efficiencies. You may also consider making the performance criteria number of goals achieved or the impact of goals reached.

4. How will performance criteria be measured?

Often employers rely solely on performance reviews to measure criteria for a pay for performance program (i.e. a rating of “5” gets the highest incentive). While performance reviews can be a helpful measure, more objective measures of performance that aren’t as susceptible to rating error, supervisory perceptions and biases, or an ineffective form, should also be considered and used to measure performance criteria. Examples of such measures include goal setting, observable behaviors, and actual results (financial, quantity, or quality measurements).

5. Who will measure the performance and make pay decisions?

Sometimes performance can be measured without an individual, but other times, especially in the case of goal setting, observation, and performance reviews, an individual will need to measure performance , typically a supervisor, manager, or leader. Because these measurements are subject to human error, it’s critical that individuals are trained appropriately. Additionally, your organization will need to determine who will make pay decisions. Will you leave this discretion to your managers, providing them a fund to distribute these rewards?  Will HR or senior leaders be involved in the process, and to what degree? Most organizations involve all three groups at some level.

6. What type of pay for performance will you offer for meeting this performance criteria?

Not surprisingly, the most common types of pay for performance are merit pay, individual incentives, and bonuses. These programs tend to be easiest to administer and focus on individual performance. Increasingly, however, we are seeing some employers offer profit sharing, gain sharing, and employee stock ownership programs. While more complicated to administer, these programs have tremendous value, providing greater transparency and line of sight into organizational performance, reinforcing teamwork and collaboration, and offering employees a greater stake in the organization – giving them a true sense of autonomy and ownership. We find that organizations are offering multiple types of pay for performance for different segments of their workforce. This is ideal when different behaviors or results are desired that don’t necessarily fit one reward approach.

7. How much pay will be based on performance?

The trick to determining how much pay will be based on performance is determining what percent or portion of pay will have an impact on employee motivation or specific results you are seeking. Generally, studies find that when only 2-3% of pay is tied to performance, this is not enough to motivate desired behaviors or results. We have seen organizations reserve 2-4% for salary increases (i.e. cost of living, across-the-board, or merit) and 5-15% for incentive/bonus payout (with 15% typically targeted for executives). For example, NorthCoast 99 winners, provide an average of 10.3% incentive/bonus payout to top performers, 5.6% to average performers, and 7.3% overall.

8. What is the timing of payout for the rewards?

Most employers pay out rewards annually, but depending on the type of program a monthly, quarterly, or biannual payout may be more beneficial. Annual payouts may help your organization better manage costs and ensure that you have the funds to pay incentives to employees; however, there are advantages to paying out more frequently. When rewards are distributed closer to the time they were achieved, employees are more likely to view them as objective and relevant to their performance. In addition, paying out more often reinforces an on-going performance culture in which performance matters all year – not just at year-end – and makes supervisors manage performance on an on-going basis.

9. How will the program be funded and what are you willing to pay (the budget)?

Most pay for performance programs are funded using organizational profits or revenues. In this way, organizations frequently make pay for performance dependent on at least two factors: individual or team performance and organizational performance. Each year, you may budget for a percentage of revenues or profits that will be used to pay for performance. Organizational performance would dictate whether payout can occur.

10. How will the program reinforce other HR programs?

Pay for performance, at its best, reinforces and complements other HR programs and total rewards initiatives. What you reward in a pay for performance program should be similar to what you reward in a recognition program and how you promote people. Be sure to send your employees consistent messages about the results and behaviors you’re looking for, otherwise, your message will be lost.

Variable Pay Plans and Incentive Programs

Variable Pay Plans and Incentive Programs

Variable pay plans can be used as a motivation and retention tool for top performing employees.

Learn More to Get Started

Workplace Gift-Giving & Bonuses

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Giving employees a year-end gift or bonus this year? Here are a few common questions and answers employers ask us about issues related to giving gifts and bonuses to their staff.

How common is gift-giving in the workplace?

Gift-giving is a fairly common practice among organizations. In ERC’s 2010 Holiday Practices in the Workplace Survey, 51% of local employers give gifts to employees. A 2010 survey conducted by BNA shows that 41% of employers across the U.S. plan to provide a year-end gift or bonus to employees, and also reports that this is the highest percent in three years.

What is the most popular holiday gift given by employers?

We find that the most common holiday gift is a generic gift card. In a 2010 survey of local employers, 61% said they provide this type of gift. Some employers also give cash, food (such as a turkey or ham), clothing or logo items, or gift baskets. In addition, a few employers raffle-off gifts versus providing them to all employees. Spending amounts for employee gifts typically range from $25-$75 per employee.

Are there any legal or payroll issues we need to be aware of when giving holiday gifts to our employees?

The IRS has different tax reporting and deduction rules depending on the cost of the gift and whether it is considered tangible (ham, turkey, wine, entertainment tickets etc.) or intangible (cash, gift cards or certificates, etc.). Intangible gifts of more than $25 are taxable income and must be reported on a W-2 form. Tangible gifts do not need to be reported in taxes. Employers can deduct up to a maximum of $25 of the cost of both intangible and tangible gifts, according to IRS guidelines.

Should we allow for gift-giving between coworkers and/or bosses?

Some organizations choose to institute a gift-giving policy on the types of gifts their employees can give and receive in the workplace. While instituting such a policy can decrease the likelihood that employees will encounter uncomfortable situations surrounding giving gifts, gift-giving can be a nice way for coworkers and supervisors to show appreciation to one another that employers may not want to limit. In general, however, gift-giving etiquette is as follows:

  • Gift-giving should be considered voluntary. No one should feel pressured, obligated, or required to give gifts.
  • Gift-giving should also be kept relatively inexpensive, simple, and modest. Several sources suggest that $10-$20 is an acceptable amount to spend on gifts for coworkers or bosses.
  • Gift-giving should be appropriate for the workplace. Alcohol, gifts with political or religious messages, romantic gifts, and hygiene-related items are typically considered inappropriate holiday gifts. Tasteful and professional gifts, cards, treating to lunch, or even donating to a charity on behalf of an individual are all appropriate ways to show appreciation.
  • Group gifts are generally an acceptable way of thanking a supervisor/manager versus an individual gift. 
  • If supervisors or managers choose to give gifts to their employees, it’s best that they are given to everyone versus only certain individuals to prevent perceptions of favoritism or unequal treatment.

Employers should consider their culture before instituting any rules as there is no gift-giving best practice that works for all organizations. Some workplaces are more formal, and others are more family-oriented, and gift-giving should generally align with the culture.

How common are holiday bonuses?

Nearly a third of local employers provide holiday bonuses, according to a 2010 ERC survey. Certainly this isn’t the majority of employers; however, it is a sizeable portion. Recent reports, however, do indicate that the holiday bonus is diminishing in popularity. Discretionary or individual performance bonuses, on the other hand, tend to be more commonly offered by employers.

What criteria should we use to determine who gets a holiday bonus?

That depends. Some employers use a holiday bonus as employees’ gift versus a reward for attaining a certain level of performance. Others only provide holiday bonuses to employees who meet certain criteria such as performance, attendance, or length of service.

How much should we spend on a holiday bonus per employee?

Bonus amounts typically range from $200-$1000 or 2% of earnings with the average being $712. The most popular bonus amounts are $200 and $1000. However, $300 and $500 are also somewhat common. Also remember that bonuses are taxable, per the IRS.

What issues should we keep in mind when providing our employees with holiday bonuses?

First, if bonuses are regularly given at your organization, it may be helpful to develop a policy which includes eligibility requirements for the bonus, criteria for receiving the bonus (i.e. average performance ratings, length of employment, etc.), how the amount of the bonus is determined (i.e. based on company profit, revenue, etc.), when the payments will be awarded, and any legal guidelines or requirements the program is subject to. A disclaimer is also recommended, so that the organization can reserve the right to administer, modify, or terminate the program at any time, should business needs dictate.

Also, make sure your organization is compliant with the Fair Labor Standards Act (FLSA). Bonuses given to employees for performance, productivity or quality need to be included in calculating an employee’s regular rate for overtime purposes. However, holiday/gift bonuses can be excluded when calculating overtime rates for non-exempt employees if they are not linked to hours worked or production.

Finally, if your organization provides holiday bonuses based on certain criteria, but not to all employees, be sure that you have documented why or why not employees have not earned the bonus to avoid any potential legal issues surrounding discriminative treatment. Performance documentation is crucial for your organization’s legal protection.

Gift-giving and bonuses are certainly great ways to show your employees appreciation and recognition during these final weeks of the year. To obtain answers to other questions related to gift-giving and bonuses, please contact ERC’s HR Help Desk (Members Only) at hrhelp@yourERC.com.