There are several ways to determine a budget for incentive and recognition programs. As employers realize that one program does not fit all, many are moving toward the trend of budgeting per program. Different “sub-audiences” in the employee population need to be acknowledged and rewarded for different results with different rule structures.
To help you out, we’ve put together the three most common approaches for building employee recognition budgets:
Fixed Budget. A dollar amount is budgeted for the program for a specified period, usually 12 months. The business rules of the program are then designed to stay within the confines of that budget. More than half of organizations typically budget between 0.1% and 0.3% of payroll dollars to employee recognition programs. According to Recognition and Other Workplace Efforts to Engage Employees: SHRM Survey Findings, organizations that budget 1% or more of payroll dollars are more likely to agree that recognition programs are fully aligned with their people strategy and important business metrics such as retention, company values and employee happiness.
Variable Budget. Variable budgets are based on outcomes and vary according to the actual performance achieved. These budgets are usually determined by financially defining the outcomes and what they are “worth” to the company.
To determine the business rules, you must first create a performance-based framework that objectively and subjectively measures employees. This framework can yield significant outcomes if it is designed in collaboration with business stakeholders.
Allocated Budget. Using allocated budgets, each division, vice president, location or manager is given a budget for a specified time. Budgets are based on stated criteria, which might be.
- A predetermined amount by employee (e.g., $200 per employee per year). Dollar amounts are translated into an appropriate award or recognition currency, usually in the form of points
- A per-employee amount based on a percentage of payroll
- A flat amount allocated to an organizational group or entity
The non-redemption of points is another budget consideration in point programs. Not all points issued to employees are used to order awards. Non-redemption is usually in the 10% to 15% range and should be used in budget calculations. Another consideration is whether you’re being billed on a points-redeemed model or a points-issued model. While there are cost benefits to both, it is important to understand which model will work best with your budgeting needs.
When budgeting for performance-based programs, it is important to consider the tax implications for the employee. Tax issues vary by state and by type of award and are subject to federal regulations. To help with this expense, most employers “gross up” the awards to alleviate additional tax burdens on their employees. Best practices dictate that employers use Fair Market Value (FMV) calculations to reduce the taxable value of the award to the employee and therefore reduce the amount spent on gross-up
Once the budget has been established and programs have been funded, it’s easy for an organization to continue funding them year after year. However, it’s important to stop and reassess whether the money is being spent wisely. Measuring the results of your program and adjusting if needed are key factors in the life cycle of your recognition program.
Authors Note: This information originally appeared in our Best Practices for Building Employee Recognition Budgets eBook.