The challenge of offering bonuses to nonexempt and lower-paid employees
Can incentives or bonuses be effectively applied to lower-level blue-collar or white-collar nonexempt jobs (or those that generally are eligible for overtime pay)? The short answer is yes, but the rules to follow and methods of application are different.
Most employees with bonus or incentive plans are executive, managerial or professional level. They are most often classified as exempt (jobs generally not eligible for overtime pay under applicable US Department of Labor rules). But when it comes to non-exempt employees, we have found that the use of variable-pay plans is generally more restricted. Consequently design options are more limited. Here’s what creates these limitations:
Most incentive-pay plans are anchored with performance metrics that can be easily tied to the results of an individual professional (i.e.: a sales rep, manager or executive). On the other hand, outcomes for and the performance of nonexempt employees are generally less easily identifiable and measurable. Their contributions are often more recognizable within the context of a larger work unit or team, or on a company basis—and seen as contributory to success.
This does not mean they do not make a difference, they do—but, loyalty, hard work, perseverance and reliability may be their real measurable contribution to success. So, bonuses based upon team or company results are most often best used with nonexempt-level employees. Individual incentives generally will not work; team or company bonuses do.
We all have a very individual risk tolerance. What this means is that some of us are more comfortable with taking reasonable risk than others. This is a basic personality characteristic and has a strong influence on one’s career or reward choices.
A sales person, manager or executive will generally have a higher-than-average tolerance for risk. These types of employees are comfortable with incentive plans where pay may vary up or down from year to year based upon their individual results, and salaries are only a portion of one’s monthly or annual compensation. Commission or incentive plans are common where a large portion of annual pay may be “at risk.”
Nonexempt employees tend to be much more conservative when it comes to risk. This will be obvious in their selection of job or career. The jobs sought and selected often have a highly-structured work routine and limited individual direct accountability or risk of failure. These types of jobs are typically salary driven—and if pay is not exclusively salary, any bonuses are pretty small (a week’s pay or two at the most). These bonuses are a little like the cherry atop a sundae.
Always remember that nonexempt and lower-paid employees may be living on their weekly pay check, much more so than higher-paid employees. Hence, expect them to have a very different view of at-risk pay, and pay in general.
While performance measurement issues and employee risk tolerance limit what can be done when considering bonus pay for nonexempt and lower-paid employees, do not forget to consider the restrictive impact of governmental regulation as well. While pay discrimination and minimum-pay regulations apply to all employees, lower-paid jobs will always present a greater target for regulatory scrutiny.
Consequently, any incentive or bonus pay delivery system that rewards an individual or group based upon performance must clearly demonstrate the opportunity for all participants to succeed or fail—but, this is good incentive or bonus plan practice for any employee. Further, bonus practices that can vary overall pay widely by week or month for lower-paid employees must be very sensitive to governmental regulations regarding minimum pay and perhaps the calculation of overtime pay (in select cases). The Feds and states can make this all a bit tricky.
OK, so how should a company approach the issue of bonuses for its nonexempt employees? Consider the methods and possible solutions we offer below.
First we suggest that you answer the same basic (or positioning) questions with nonexempt and lower-paid employees that you would when considering and designing higher-level manager or staff incentives or bonuses:
Who should be eligible and why?
Why are incentives or bonuses being proposed for use used with these employees—what is the value proposition for both company and employee?
How will the value of an incentive or bonus be determined? [Paying for what and why?]
How much should be paid to get the attention of the employee while also making economic sense to the company?
Next with the above answers in mind, be practical with what you can accomplish with a new bonus plan for this level of employee. If history is any indication of the future, you will most likely: 1.) Group all nonexempt employees into a few affinity performance groups or consider the whole company as the group, 2.) Pay bonuses annually based upon a single discreet measure of unit or company performance [i.e.: profit, productivity, etc.], 3.) Denominate payouts in weeks of pay or $100 bills, and 4.) Assure that the range of relative bonus pay amongst employees displays only modest variations and the reasons for these differences quite clear; if you decide to pay different nonexempt employee groups differently based upon their results.
Last, communicate plan methods and results at every available opportunity. You want to make plan participation and the bonus plan itself a force that binds employee and company together in a common goal of doing better.
Now some might say that I have just described a typical profit-sharing bonus plan above. I am guilty on that charge. While profit sharing is only one of a number of bonus solutions, it generally works pretty well and fits nicely into the limits and restrictions we have outlined.
Do you want to install a bonus plan for your nonexempt employees? Follow the simple steps we have outlined above and know your limitations. If you are concerned about or want to better understand applicable Federal or state pay regulations [like overtime calculations], or you have a union workforce, pick up the phone today and have a chat with your legal counsel before you do or say anything. If you do not have one, I can recommend one.
In closing remember this is not just a bonus plan, but a force that binds employee and company together in a common goal of doing better.
[Wilkening & Company wants to thank John Larkin for his help with this article.]
Wilkening & Company has helped many clients design incentive or bonus plans for executives, managers, professionals and hourly staff. If you want to speak about building new pay plans for fixing current ones, give us a call at (847) 823-5090. We would be happy to speak with you and share our experiences.