Performance Awards in Nonprofit Organizations

Q. I work for a large nonprofit organization. Employees may receive cash or time-off awards based on excellent annual performance reviews. We have been told the issuance of these awards is contingent on meeting nonprofit organization criteria imposed by the IRS.

Every year, employees are left in the dark regarding the certainty of receiving an award and the timeline for receiving it. A supervisor may hint that he or she will recommend a performance award, but there is no formal confirmation (until the award is issued) and HR will not respond to inquiries. Typically, an eligible employee could receive this award nine to 12 months after the annual review has occurred.

This seems like an unethical way of rewarding employees. There have been employees who learned they had been scheduled to receive awards, but left the organization before the awards were issued – almost 12 months after the annual review. Are these practices legal?

A. Nonprofit organizations, like many for-profits, use performance based awards to reinforce desired performance. The award criteria is set by the organization, not the IRS. For-profit organizations have to make a bonus payout no later than 10 weeks after the close of their fiscal year to be able to deduct the payout in their previous years taxes. Since this is a not-for-profit (NFP), taxes do not impact the timing of the presentation of the award.

I consulted Tom Wilson, President of The Wilson Group, experts at compensation and incentive plans to maximize performance, who notes “When employees are ‘kept in the dark’ about any reward program, it’s a problem of effectiveness, not ethics. You rightfully highlighted the frustration of not knowing if you’re likely to receive an award or when you’re likely to receive it.”
Terminology in these plans matter, and can impact how formal or informal the process can be. Is this a bonus plan? A special recognition awards program? There may be any number of reasons for a process delay. Perhaps the rewards are reviewed by a large group of people; the organization wants to see how they are doing financially before they commit; or an executive wants to maintain control over the process and not be held to a schedule.
Regardless of the type of plan, your organization seems to have missed a primary characteristic of rewarding people. Wilson describes the circumstances for effective reward programs, whether they are cash, tangible awards, time-off, as:
-People know the measures, standards or goals on which the awards are based and
the process for assessing performance is trusted and transparent.
-The process for making awards does not set up counter-productive
competitiveness, but bases the awards on achievements that are aligned with the
organization’s mission, goals and values.
-The rewards are meaningful to the individual, and reflect the level of performance
achieved. The rewards are given in a timely manner, so that individuals directly
associate what was awarded with what was accomplished.
Many plans require individuals to be employed by the organization to receive the award, and are viewed as retention tools. Most states, Massachusetts included, do not require employers to pay earned rewards after a person has left the company. California is an exception.
Wilson closes with, ”These practices are legal as long as they do not distort the mission of the organization away from its charter. Most 503(c) organizations are ‘mission driven’ and nonprofit-driven. The granting of the awards needs to comply with all tax policies, but there are many reward programs and practices that are legal, effective and consistent with the values of the organization.”
Though you mentioned HR wont respond to inquiries, you can let them know that although the benefit appears to be substantial, it’s not having as positive of an impact as it potentially could. Ask for more transparency into the process itself, or into the reason for the lack of transparency.
-Elaine Varelas, Managing Partner, Keystone Partners
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