Copyrighted Material CASH BONUSES. Four Ways to Attract, Retain and Motivate Employees. Copyrighted Material

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1 2005 Updated with Survey Data CASH BONUSES Four Ways to Attract, Retain and Motivate Employees

2 Acknowledgments Writer Barbara Parus Technical Review Gary Bergel, Restructuring Associates Inc. Doug Grieser, CCP, WorldatWork Alan Judes, Hewitt Bacon & Woodrow Limited Jo Anne Moeller, Zimmer Larry Reissman, HayGroup Mark A. Szypko, CCP, A.R.M. Consulting Group Graphic Design Maggie Conners Staff Contributors Lane Abrahamsen Dan Cafaro Randa Hightower Betty Laurie Wendy McMorine Rebecca Williams Ficker WorldatWork is the world's leading not-for-profit professional association dedicated to knowledge leadership in compensation, benefits and total rewards. Founded in 1955, WorldatWork focuses on human resources disciplines associated with attracting, retaining and motivating employees. Besides serving as the membership association of the professions, the WorldatWork family of organizations provides education, certification (Certified Compensation Professional CCP, Certified Benefits Professional CBP and Global Remuneration Professional GRP ), publications, knowledge resources, surveys, conferences, research and networking. WorldatWork Society of Certified Professionals; Alliance for Work-Life Progress (AWLP); and ITAC, The Telework Advisory Group are part of the WorldatWork family. WorldatWork N. Northsight Blvd., Scottsdale, AZ / Fax 480/ , 2003 WorldatWork ISBN: (Paperback/softback) (E-book) No portion of this publication may be reproduced in any form without express written permission from WorldatWork.

3 Table of Contents Introduction...vii Cash Is King Again...ix Relating Bonuses to Talent...ix Let s Get Started...x Chapter 1: Tying Cash Bonuses to Total Rewards...1 The Total Rewards Model...2 Hot Skills and Critical Talent...4 The Compensation Philosophy...4 Cash Bonuses in the Total Rewards Mix...5 Total Rewards Statement...7 Sample Total Rewards Statement...7 Chapter 2: An Overview of Cash Bonuses...9 Building a Business Case...10 Presenting the Award...15 Award Follow-up...16 Communicating Cash Bonus Plans...17 Cash Bonus Plans in a Unionized Environment...19 Chapter 3: Sign-on Bonus...21 The Tale of BioKing A Fictional Case Study...22 What Is a Sign-on Bonus?...24 Sign-on Bonuses in Other Industries...27 Design Guidelines...29 Cash on the Line?...31 Aligning Sign-on Bonuses with Total Rewards...32 Executive Sign-on Bonus...32 Executive Sign-on Bonuses Make Headlines...34 Potential Pitfalls...36 Communicating a Sign-on Bonus...37 Cash Bonuses iii

4 Chapter 4: Referral Bonus...39 What Is a Referral Bonus?...40 Eligibility...43 Timing of Cash Award Distribution...43 Referral Bonuses for IT Professionals...44 Selling the Program to Employees...45 Promoting an Employee Referral Program...45 Communicating the Referral Program...46 Sample Employee Referral Bonus Program Rules...48 Sample Referral Bonus Policy...49 Sample Employee Referral Bonus Form...51 Chapter 5: Spot Bonus...53 What Is a Spot Bonus?...54 Size of Bonus...57 Spot Recognition Program Guidelines...57 How to Effectively Use Spot Recognition...60 Sample Spot Recognition Policy...61 Potential Pitfalls...62 Conducting the Recognition Event...63 Documenting Recognition...64 Communicating the Recognition Program...65 Who Does the Recognizing?...65 Tax Requirements and Legal Compliance...65 Rules for Developing Written Communications that Comply with Regulating Guidelines...67 iv Cash Bonuses

5 Chapter 6: Retention Bonus...69 What Is a Retention Bonus?...70 Building a Business Case...71 Meeting Organizational Goals...73 Combating Turnover...73 Retention Bonus Q & A...74 Retaining Executives During Bankruptcy...76 ERISA Implications...77 Potential Pitfalls...78 Communicating the Retention Bonus Plan...79 Sample Retention Bonus Guidelines...80 Chapter 7: Tax Regulations...85 The Fair Labor Standards Act...86 Withholding on Supplemental Payments...86 Bonuses...87 How to Withhold...87 Discretionary Bonuses...88 Rules and Regulations for Bonuses...89 Directory of State and Federal Agencies...92 State Labor Departments...98 Federal Wage and Hour Offices Cash Bonuses v

6 Appendix Bonus Program Practices: A WorldatWork Member Survey, August Introduction and Methodology Executive Summary Sign-on Bonus Survey Data Survey Survey Survey Referral Bonus Survey Data Survey Survey Survey Survey Spot Bonus Survey Data Survey Survey Survey Retention Bonus Survey Data Survey Survey Survey Glossary of Terms Selected References vi Cash Bonuses

7 Introduction

8 Companies are always looking for a business advantage. Whether it s a new product, catchy advertising slogan or being first to market, organizations try to build an edge to succeed. Business leaders recognize the importance of human capital and having the best and brightest people working for them. Just like in sports, those with the best talent have the best opportunity to win. Organizational leaders are responsible for finding, attracting, motivating and retaining top talent. While executive recruitment and placement firms provide support in this area, senior leaders are turning to total rewards professionals to develop strategies to counter the efforts of other companies, industries and talent agents. These competing entities present a threat to a company s ability to maintain a high-caliber work force, particularly in regards to hot skills and critical talent. In today s high-performing organizations, total rewards professionals support the attainment of corporate objectives through the development and implementation of strategies, which ensure that key employees feel valued and rewarded for their efforts. For rewards professionals focused on creating attraction and retention programs, cash bonuses are effective tools. Used correctly, a cash bonus can be a quick, easy and valuable tool to promote employee satisfaction and commitment. After all, what employee wouldn t appreciate a $1,000 check to recognize outstanding achievement? But, used incorrectly, it can be a waste of precious dollars and a source of discontent in the work force. Much has been made of stock options and stock grants in the past decade, especially with the wealth they created in the high-tech and dot.com boom of the mid- and late 1990s. Despite the turmoil that accompanied the bursting of the high-tech bubble in the stock market, cash bonus plans have remained an important element of total rewards. When all is said and done, the phrase made popular in the movie Jerry Maguire Show me the money sometimes is just the ticket for getting and keeping top talent on board. In fact, employers have reported that referral bonuses and sign-on bonuses are the two most enticing and frequently used attraction/retention tools, according to the WorldatWork Total Salary Increase Budget Survey. On viii Cash Bonuses

9 the executive front, the media have well publicized the sign-on and retention bonuses that have been offered to CEOs to guide faltering companies through bankruptcy. Cash Is King Again Despite economic uncertainty, cash bonuses have been among the few variable pay plans that have remained intact. Companies that want to retain employees in these challenging economic times can turn to cash bonuses (sign-on bonuses, referral bonuses, spot bonuses and retention bonuses) for results. Employers can implement these tools to remind their staff how much they are appreciated and communicate a fresh commitment from the employer to the employees. Cash bonuses are tangible here-and-now rewards that immediately benefit employees. Cash bonus plans also can be designed to reward performance and behaviors that are tied to the company s bottom line, instilling pride in the organization. Employees participating in such a plan know if they succeed, the company succeeds. If the company succeeds, they will be rewarded. Relating Bonuses to Talent When it comes to bonuses specifically aimed at attracting and retaining key talent in an organization, sign-on, referral, spot and retention bonuses are directly committed to this very task. Each of these bonus vehicles is highlighted below and discussed in detail in Chapters 3, 4, 5 and 6. Sign-On Bonus Sign-on bonuses are true to their name. All along the corporate ladder, these bonuses are used as a tool to further entice prospects to join the organization. Companies have used sign-on bonuses to fill spots in high turnover areas, such as customer service and call centers. They also are used, in much larger denominations, to attract a dynamic executive or a top researcher. Referral Bonus Many employers have found that the best source for new talent is right in their own back yard. For years, referrals to fill open positions have come from current employees. Because attraction and retention are high priorities these days, compensation professionals have decided that their recruiting efforts would benefit by rewarding current employees who refer job candidates who Cash Bonuses ix

10 ultimately are hired. Referral bonuses not only help with recruiting, they also instill pride in the company when employees feel that their contributions are valued. Spot Bonus Spot bonuses provide managers with a tool to instantly recognize an employee for outstanding performance. These bonuses are subjective and may or may not be used throughout the year. But having a spot bonus plan in place provides a tool to battle salary complacency. Retention Bonus Employers usually give retention bonuses to keep employees on board during an organizational restructuring, such as a merger or acquisition. This cash bonus can vary greatly in amount depending upon the position, level of talent and importance of the particular employee or role. Let s Get Started WorldatWork conducted surveys from 1999 to 2002 to find out how many companies are using cash bonus programs to attract and retain employees. This book is a direct result of that research and provides guidelines and tools necessary to design and implement the four types of cash bonuses noted above within your own organization using the valuable survey data in the appendix as a reference tool. The appendix also contains data that reflects employee eligibility, bonus amounts, payout distribution and other pertinent information. It is important for compensation professionals to have a grasp of these four types of bonus plans and understand why and how they are implemented and administered. This book provides an in-depth look at these cash bonuses and presents ways compensation professionals can sell these incentives to management and maintain the success of the plans once they are implemented. Before delving into the world of cash bonus plans, Chapter 1 will explain the concept of a total rewards philosophy and how cash bonus plans fit into such a philosophy. Chapter 2 provides an overview of the four cash bonuses, including how to establish a design team to develop, implement, communicate and administer an effective bonus plan. x Cash Bonuses

11 Chapter 3 introduces a fictitious company, BioKing Pharmaceuticals, to illustrate how to design and implement sign-on, referral, spot and retention bonuses within an organization. From building a business case for management review, approval and buy-in to developing program guidelines, delegating administration responsibilities and communicating bonus information to appropriate individuals, readers will follow BioKing s journey throughout the decision-making and implementation processes of the various bonus programs detailed in Chapters 3 through 6. Chapter 7 gives important information on the tax and legal implications of bonuses, as well as cash bonus plan administration. Checklists, potential pitfalls, sample policies, tax regulations and a glossary of terms augment the text. Cash Bonuses xi