It’s that time of year again — time to start crunching numbers to determine how much budget will be set aside next year to reward and recognize employees. This figure varies based on the number of employees you have, but the Society of Human Resources Management (SHRM) suggests that a rewards budget of 1% or more of total payroll is key for a successful program.
Building a Case
But, let’s back up a step. Do you need to make a case for employee rewards and recognition in order to budget for it? If so, a Gallup Study proves employee rewards creates ROI through increased employee engagement:
- Companies with high employee engagement are 23% more profitable.
- Highly engaged business groups experienced 81% reduction in absenteeism and a 23% increase in productivity.
- Employees that communicate openly and frequently trust each other more, work faster and are more productive.
- Companies with highly engaged employees see 61% less turnover, saving their companies thousands of dollars in turnover and recruitment costs each year.
If you need more help convincing your leadership to establish a rewards and recognition program (and allocate budget accordingly), here’s a great article on Making the Business Case for an Employee Engagement Program.
Determine Program Components
Assuming you have executive leadership buy-in, what should your rewards and recognition program look like? Should you use it to mark years of service milestones? To recognize achievements? To reinforce good behavior and company values? To motivate and enhance performance? To celebrate employee life events? All of the above? You’ll likely need to include a different budget line for each type of recognition, all of which rolls up into your total recognition budget.
According to SHRM, the most common types of recognition are timely, developed with input from employees, and tied to business outcomes. Use these factors to craft a program that is just right for your organization’s mission, vision and values.
Types of Budgets
Next, you will need to determine what type of budget works best for your organization. There are three main types:
Fixed budgets set a dollar amount (usually the same amount per employee) for the program during a specified period of time, typically one year.
- Pros: Provides easy accounting of program costs
- Cons: Offers less flexibility to reward when dynamic changes occur within your organization
Allocated budgets are also for a specified period of time, but managers are given discretion to deliver when, how and to whom they want.
- Pros: Gives the managers who are most familiar with employees the opportunity to reward them for specific behavior or initiatives
- Cons: May be counter-intuitive to building a positive team culture in that it is de-motivating to employees who receive nothing
Variable budgets are a bit more complex and are based on a performance-based system of evaluating employees. In other words, these budgets are usually determined by financially defining the outcomes you want from your employees and setting a value to what they are “worth” to the company.
- Pros: Programs with variable budgets can provide greater business outcomes, creating potential to increase rewards with the additional gains; variable budgets can be allocated, giving managers more or less depending on program performance
- Cons: If goals and objectives are not outlined prior to program start, reporting and metrics may not be available to support your budget
If you don’t know where to start, go with the simplest model first and as your program grows, you can evolve your budget model to suit your needs.
Take a Quick Enterprise Assessment
Most companies spend more than they realize because the management of their rewards and recognition program is decentralized. Departments or business units that are “doing their own thing” have adhoc activities, different distribution methods, no budget tracking and little alignment with company goals or values.
To get a more complete picture of what your program landscape looks like, poll each department and business unit as to what they are spending and how they are rewarding their workforce, before you begin your budgeting process. Use the ‘what, when, where, why and how’ method to gather information. It will likely shed some light on inefficiencies, redundancies, gaps and wastefulness. By consolidating all your programs, you’ll be armed to budget more effectively.
Understanding Tax Implications
Cash and prizes awarded to employees can be considered taxable income, so before you set a budget, you’ll need to determine whether your company intends on paying taxes upon reward issuance, or upon reward redemption. When taxes are paid upon issuance, your organization is covered on all tax liability but the employee will get taxed, especially if your program is points-based. When taxes are paid upon award redemption, an Inspirus Best Practice, it minimizes the tax burden on the employee to only the rewards they physically received. You’ll need to decide which tax scenario works better for your organization, so you can include any implications or liability within your budget.
While we’re on the subject of taxes, most employers “gross up” rewards to alleviate additional tax burdens on their employees. Fair market value calculations are used to reduce the taxable value of the award to the employee and therefore reduce the amount spent on gross up. Loop in your legal team or accounting department to cover all bases. Plus, here are the IRS Guidelines on employee rewards and recognition.
A budget is not a “set-it-and-forget-it” business component. Conducting a semi-annual budget review to make sure your program is on track is a smart business practice. It will give you good sight lines into whether budget spenders are using their budget too soon and are running out (missing opportunities for recognition later in the period), or if they are “sandbagging” their spend until the end of the period, missing earlier critical recognition opportunities.
By proactively setting a budget for employee rewards and recognition, you’ll be Increasing employee engagement and gaining a competitive advantage for your organization.