Business Insights

Navigating Performance Rewards

Bonuses and performance reviews may seem harmless - even positive. But when handled improperly, they become legal landmines. So, how do you handle these activities without exposing the organization to unnecessary risk?

Bonuses

Bonuses, especially when unexpected, are arguably one of the most appreciated gestures organizations do for their employees. So, where’s the harm in that? It’s not necessarily the bonus itself that creates the potential for liability; rather, it’s the process of determining who gets one and how much. 

Simply put, the less subjective the criteria, the better. Amounts that appear arbitrary from one employee to the next or unrelated to anything employees can understand open the door for claims of discrimination and favoritism, particularly when it appears members of a protected class (age, race, sex, etc.) receive lower amounts than others. The following are best practices for creating a bonus system free of discriminatory bias that employees are more likely to trust.  

  • Criteria should be objective and measurable, such as documented productivity or pre-set performance standards.  Any reductions in bonus amounts should be documented with legitimate and quantifiable data.
  • Be mindful when absences and/or a correlating reduction in productivity that result in a lower bonus may be viewed as retaliation for exercising a legal right, such as the Family and Medical Leave Act (FMLA) or the Americans with Disabilities Act (ADA). Criteria impacted by these things should be documented with extra due diligence.
  • Ensure bonus amounts, particularly those rooted in discretionary criteria, are reflective of the employee’s performance reviews or any issues with attendance or conduct. If an employee has been under disciplinary action, higher bonus amounts call into question the employer’s motives.
  • Managers involved in the determination process should be trained in issues surrounding discrimination, retaliation, and bias.
  • Carefully review bonus amounts for unintended effects, such as those in a protected class consistently receiving lower amounts. Even outcomes that are meant to be fair and neutral can result in illegal discrimination if the effect appears discriminatory or has a particularly negative impact on those in protected classes.
  • The entire process should be documented, and documentation used in calculations should be maintained. Any contractual obligations – explicit or implied – in employment agreements, company policies, etc., should be considered.

As an aside, under the Fair Labor Standards Act (FLSA), non-discretionary bonuses must be included in non-exempt employees’ regular rate of pay when calculating overtime, whereas discretionary bonuses do not. Even holiday bonuses may be considered non-discretionary, depending on employee expectations of such bonuses and the criteria used for calculation. Employers should scrutinize their bonus structure closely to determine if it is non-discretionary. See the Department of Labor’s website for additional information about overtime calculations with non-discretionary bonuses.

Performance Appraisals

The annual performance review is standard for many employers.  Used as a basis for pay decisions, promotional opportunities, and disciplinary action, a poorly designed or executed performance management process is a hotbed of legal liability. So, what are some common risks in this process?

  • Assessing the person instead of the performance. Focus on definable activities and measurable results, not personal traits.
  • Infrequent or insufficient feedback. Feedback should be thorough, ongoing, and in real-time.  Formal performance reviews are merely one possible step in an effective performance management system.
  • Lack of facts or specifics. Relying on memory or using “I think” or “I feel” statements does not result in quality feedback that the employee can translate into action.
  • Not measuring the right things. Irrelevant factors or focusing solely on final output does not result in meaningful feedback that promotes growth and development.
  • Lack of manager accountability. Missed, late, or sloppy reviews should not be tolerated. A manager’s performance review should address adherence of the process with his direct reports.
  • Lack of manager training. A manager who is not trained on how to measure and document performance is arguably the most dangerous element of the process.
  • Focusing only on problems and not solutions. Effective performance management means ensuring employees have the skills, knowledge, and resources to succeed or correct deficiencies.
  • Misalignment. There should be clear correlations between the employee’s job, the goals of the department/organization, what performance appraisals measure, and rewards.
  • Surprises or avoidance. An “official” review should merely formalize what the employee already knows and has been coached on throughout the year. Unexpected negative feedback calls the manager’s motives into question and erodes trust and morale. 
  • One-way process or communication. Employees should be active in the goal-setting and review process, including a means of challenging an appraisal with which they disagree.

A closing thought about rewards in general: While bonuses and pay raises are certainly the most familiar outcome of performance reviews, the importance of non-financial recognition cannot be overstated. Appreciation that is personalized and sincere goes a long way toward increasing loyalty and morale. A personal letter from the CEO, a gift to the employee’s child or pet, or a donation to a charity of the employee’s choosing are just a few examples of thoughtful recognition that show you know your employees and appreciate what matters to them. Financial rewards fill financial needs, whereas these other types of recognition bring social and emotional satisfaction. Just be certain to always consult with your accounting team to determine the taxability of any rewards you are considering. Cash, or anything that could be construed as a cash equivalent is nearly always taxable, no matter how small the amount.

 

Affinity HR Group is BSCAI's endorsed HR partner, providing HR support, recruiting and employee engagement services.  For a link to our menu of services for BSCAI members, go to www.AffinityHRGroup.com/BSCAI.