On the fifth day of Christmas my true love finally realized that I’m not a fan of feathers and provided me with an accessory I could use—golden rings. Some employees may similarly look forward to high value gifts included in your company’s incentive pay programs. Incentive pay programs come in a variety of forms including group and individual incentives, profit-sharing, bonuses, stock options, and piecework pay to compensate employees. Incentive pay programs are often favored by employers as a means to control payroll costs and motivate employee performance by coupling increases in pay with increased performance.

An overview of the process of developing an incentive plan, as well as recognizing potential FLSA issues is important. In designing or revamping an incentive plan for your company you will want to look at a number of different factors to make sure your plan works for your company:

  • Consult with Supervisors and Nonsupervisory Employees- They know their job best and know what incentives will work. Moreover, if they are consulted during the design of the plan they will likely be more apt to support the policy if it is adopted.
  • Set Incentive Awards- This is usually done using either targets or formulas. Targets are determined by comparing actual performance with targets while formulas generate a pool of funds which eligible employees then share in on a pro rata basis.
  • Eligibility- Make sure your company determines a way to measure employee contribution. If there are too many factors that contribute to job results that are outside the employee’s control the contribution will be too difficult to measure.
  • Performance Criteria- Measures should be easy to quantify and track. Often companies will use measures such as overall company profits, return on assets, or number of units produced by a specific business unit.
  • Time- You should consider whether this is a short-term or a long-term incentive plan, will it go on for less than a year or more than a year?

Remember that these incentive awards will be included to determine an employee’s regular rate of pay in any potential future FLSA lawsuit. 29 C.F.R. § 778.211(c). Bonuses and incentive payments that are provided to employees as a result of the quality, quantity, or efficiency of production including length of service payments, production or work incentive bonuses, bonuses based on a percentage of sales, cost-of-living bonuses, stock bonus plans, and attendance bonuses are all forms of incentive payments that will be included in determining an employee’s regular rate of pay.