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Emerging Issues in Employee Incentives and Recognition

The U.S. Office of Personnel Management's Performance Management and Incentive Awards Division (PMIAD) staff presented a breakout session on emerging award issues at the TRANSFORMATIONS '98 conference. During the session, the speakers discussed how awards can be used to support organizational objectives and the latest developments in employee incentives and recognition.

• Why should agencies align awards with organizational goals?
• What forms of awards can agencies use to recognize employees?
• What is the difference between recognition and incentives?
• Must employees pay taxes on all awards, even nonmonetary?
• Where can I get more information about awards or related tax issues?

Why should agencies align awards with organizational goals? The act of recognizing and rewarding employees communicates what the organization values. When an award is granted to recognize goal achievement, the agency is signaling that those goals are important. Such awards will focus employees' efforts and communicate what is important to accomplish. Unless award programs have clearly-stated objectives and are used to recognize individual, group, or organization goal achievement, the program will lack direction and likely will be ineffective as a management tool. The speakers encouraged attendees to take advantage of the flexibility in the awards regulations to develop awards that support organizational objectives.

What forms of awards can agencies use to recognize employees? Governmentwide award regulations found at part 451 of title 5, Code of Federal Regulations, allow agencies the flexibility to recognize employees for a wide variety of accomplishments, as well as to create incentives, using four forms of awards: cash, time off, honorary awards, and informal recognition.

What is the difference between recognition and incentives? Recognition provides after-the-fact reinforcement for specific types of performance or accomplishments and signals what the organization values. Incentives focus employee efforts on the organization's goals and often promise specific rewards to those employees who help significantly to achieve them. Federal award programs have tended to reward performance and accomplishments (that is, provide recognition) rather than encourage new or improved performance (that is, serve as an incentive). Agencies should analyze their work structure and culture to determine which type of award works best in a given organization or circumstance. The award regulations provide enough flexibility to allow a wide variety of approaches and methods for recognizing employees and providing incentives.

Must employees pay taxes on all awards, even nonmonetary? Yes, taxes must be withheld from employees' salaries when they receive awards—including certain nonmonetary awards. Cash provided by the employer to the employee (i.e., salary, wages, supplemental wages) is always taxable. Taxable fringe benefits are non-cash items provided by the employer to the employee and are viewed by the Internal Revenue Service (IRS) as supplemental wages (i.e., additional compensation). As honorary recognition, agencies have been giving award items such as plaques, pins, certificates, and medals. These items clearly convey honorary recognition and do not run the risk of being mistaken for hidden or additional compensation, which could make them taxable as fringe benefits. But as agencies expand their use of honorary and informal recognition awards—using gift certificates or other cash equivalents, merchandise, and other non-cash items—agencies need to know when cash-equivalent or nonmonetary awards are considered additional compensation and what tax implications that brings.

Taxes should be withheld from employees' salaries if the award is considered a cash equivalent (i.e., it has a clear, monetary face value, or it gives the employee broad choice in selecting the final item received). Agencies have the option of not withholding taxes if the fair market value of the award is so small that accounting for it is unreasonable or administratively impracticable to report after taking into account all the facts and circumstances, including frequency.

Where can I get more information about awards or related tax issues? For general information on awards or their tax implications, contact PMIAD. For information about applying the IRS tax criteria, contact your local office of the IRS.

Originally published on October 1998.