Rewarding Exempt Employees

By Sep 1, 2006
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HR Magazine, September 2006 Employers are finding ways to acknowledge exempt workers' exceptional performance.

For ex​empt employees with the Methodist Hospital System in Houston, it’s natural to expect to work long hours when disaster threatens. Last fall, about half of the city’s residents fled when Hurricane Rita bore down on Houston. But at the system’s four hospitals, employees poured into the facilities, preparing days in advance for the approaching storm.

With about 9,500 employees, including more than 1,800 who are exempt, “each [person] has some piece of responsibility to prepare for the storm,” says Donald Miller, the hospital system’s director of employee relations. That’s especially true for exempt employees, most of whom are considered essential, and are required to remain on duty until the job is completed or the crisis has passed.

One employee who spent long days on the job during the emergency was Steve Prime, a manager in the food and nutrition services department, which is responsible for providing meals for patients and staff. Prime also was on duty in 2001 when Tropical Storm Allison dumped about 3 feet of rain on the city over several days, forcing all but the most ill patients to be evacuated eventually from the hospital. Through it all, “most managers were required to stay,” Prime recalls.

After the floodwaters from Allison subsided, Prime received an $800 bonus to acknowledge the long hours he worked. And in the wake of Hurricane Rita, which veered away from Houston at the last minute, sparing the city, he received a $150 Visa gift card and an extra eight hours in his paid-time-off bank.

“It’s a small gesture to let employees know they’re valued and appreciated,” Miller says.

For HR, understanding the legal and practical issues involved in rewarding exempt employees when they put in extra hours is critical to determine what form of reward is appropriate and effective for this group of workers and to avoid mistakes that could lead to the reclassification of exempt employees. ›

Legal Issues

Most HR experts agree that organizations can’t begin to compensate exempt employees monetarily for the extra hours they put in. And some caution that organizations shouldn’t even try.

“The hard part is determining whether you should do anything, and, if you do, how do you determine what to do,” says Heather J. Broadwater, an associate in the Washington, D.C., office of the law firm Krupin O’Brien LLC.

Until 2004, employers were discouraged from paying extra to exempt employees who worked long hours for fear it would call the employees’ exempt status into question. But changes to Part 541 of the U.S. Department of Labor’s regulations for the Fair Labor Standards Act (FLSA) now allow employers to pay exempt employees extra, without violating their status, says Rodney Cottrell, SPHR, of Corporate Compensation Partners LLC, a compensation management consulting practice in Sewickley, Pa.

The change in regulations, Cottrell says, can provide additional payment To exempt employees in the form of a flat sum, time off, bonus payment, straight time, or time and a half and may be required to have a "reasonable relationship" to the employee's usual earnings.

Even though extra payment for extra work now is permitted, employers still need to be concerned because a worker’s exempt status could be harder to prove if the employee is paid time and a half, like a nonexempt employee, Broadwater says.

Employers also need to exercise caution and play by the rules. Cottrell cites one executive at a manufacturing firm who used the corporate bank card to withdraw money from an automatic teller machine, and then handed out the cash to employees. That action carried the risk of running afoul of Internal Revenue Service rules because the employer didn’t pay taxes on the money and it wasn’t reported on the employees’ W-2 forms.

Defining ‘Above and Beyond’

Along with concerns about maintaining an employee’s exempt status, experts agree that company officials need to give hard thought as to what type and amount of work should merit extra compensation.

To Cottrell, an exempt employee who works eight extra hours a week might simply be considered to be doing her job. But if that same employee takes on new duties temporarily, or has to work 60 hours a week for an extended period, extra compensation might well be in order. But what is considered “normal” working hours can vary greatly from organization to organization.

Catherine Dovey, SPHR, the head of Dovey HR Strategies in Seattle and a member of the Society for Human Resource Management’s Total Rewards/

Compensation and Benefits Special Expertise Panel, urges organizations to focus not on the number of hours an employee puts in but on the outcome of those extra hours. She says companies should value “butt-in-the-chair time differently than outcomes. Otherwise, sitting in the chair becomes the goal, as opposed to productive results.”

Organizations need to examine whether the time put in can be called “productive hours. Maybe they could be as productive in 45 hours as 55,” Dovey says. She also suggests that employers use metrics to “link productivity outcomes to individual payout levels.”

Employers also must figure out the best way to compensate exempt employees. Dovey says some manufacturers in the Northwest pay exempt employees straight time for all the extra work they put in above 45 hours. Other organizations might opt for comp time, bonuses or gift certificates.

“It’s up to the individual businesses, depending on business needs, finances, ability and culture,” Broadwater says. However, employers need to keep in mind that they might be raising employee expectations. If they provide extra compensation in one instance, the employee might come to expect it in the future.

Assessing Long-Term Implications

While employers “absolutely can” provide extra pay to exempt employees, “they just have to be very deliberate about how they do it and think through all the implications,” Broadwater cautions.

“I’d be so hesitant to lock myself into something,” says attorney Diane M. Pfadenhauer, SPHR, whose consultancy, Employment Practices Advisors, in Northport, N.Y., deals with legal and HR issues.

Crises such as the effects of a hurricane, the aftermath of a terrorist attack, a flu pandemic, or even a strike might last for weeks. If a company offers to pay its employees an extra $1,000 a week, that could stretch the organization thin if the crisis is prolonged. “Many [events] are so unpredictable,” says Pfadenhauer, who traveled to the Gulf Coast last year with the Turnaround Management Association to take part in a workshop aimed at helping small businesses recover from the devastation of Hurricane Katrina. The nonprofit association focuses on corporate renewal and turnaround management.

In events such as a major hurricane, a company’s revenue stream might dry up completely, and Pfadenhauer says that the more extreme the event is, the more she would recommend giving employees something other than money. For example, if someone’s roof is ripped off in a hurricane, a gift card to a home improvement store might be particularly welcome. ›

Let Them Have Options

Susan Richards, a principal in the HR practice of Atlanta-based Buck Consultants, urges employers to “really try to understand what it is [employees] find valuable.” It might vary from additional educational opportunities to work/life balance to a more flexible work schedule to recognition from peers. “I don’t think there’s a one-size-fits-all reward program out there that’s going to work.”

That’s been the discovery at GeoEngineers Inc., a Redmond, Wash., consulting engineering firm. Many of the firm’s engineers face domestic and international travel “that is just brutal,” says Karen L. Erne, PHR, director of human resources. It could mean three months on a boat off the Brazilian coast, or working at the Beaufort Sea on the coast of northern Alaska and Canada.

For years, the company has paid exempt engineers straight time for any work they put in over 40 hours. But for the past few months, the company has also added “uplift pay,” providing bonuses for each day someone must travel, and extra time off. Employees can opt for extra pay or time off, or a combination of the two. Erne says the catalyst was the “exorbitant amount of travel” required of the company’s specialized engineers.

The policy acknowledges that “one person is motivated by money, another by time off,” Erne says. And much of the difference can be attributed to the new generation coming into GeoEngineers’ ranks. Generally, older employees have desired extra cash.

But among the 20-somethings, she says, the attitude is: “Pay me fairly, but what I really want is time off work if I’ve been gone for months. It’s very different than what we see from the 50- and 60-somethings.”

Other companies might consider paying for an employee to attend a night class or seminar as a means of compensation, or allowing him to work from home during an extended project.

“Money is great,” Richards says. “But it’s the recognition that a lot of employees crave. It’s a different sort of motivator. It’s a need we all have for self-actualization.” That recognition can come in various forms, from an article in the company newsletter to an award at an employee luncheon.

Extra Encouragement

Dovey also recommends that companies tailor their rewards to individuals’ preferences. She knows of one manufacturer that employs many hunters and campers, so it scheduled a big deadline right before moose hunting season, then gave employees extra time off when the season began. “It hit them right where they live,” Dovey says.

Hitting them where they live might also involve including families in the extra compensation. Roberta Chinsky Matuson, president of Human Resource Solutions, an HR provider in Northampton, Mass., says that demanding extra hours from employees also takes a toll on their partners. As compensation, organizations might want to consider providing prepared meals for employees to take home, giving them theater tickets and money for a baby sitter, or providing tickets for the whole family to their favorite sporting event.

“Think outside the box,” Matuson recommends. “If you try to compensate people with bonuses, it’s never going to be enough.”

Dovey suggests that organizations separate out the extra pay from regular pay, citing as an example a survey she had conducted at an organization that had included bonuses in the employees’ regular paychecks. Of the 25 people she queried about the amount of their bonuses, not one got it right. “It’s really horrifying how invisible this stuff is to people.”

Instead, she recommends handing the bonus money out at a different time than the regular pay period, and using a check rather than direct deposit. “It has a different feel to it.”

At the Methodist Hospital System, giving out the gift cards after Hurricane Rita “was generally acknowledged as something the organization didn’t have to do, so it was appreciated more,” says employee relations director Miller.

That sense of encouragement and appreciation can make a big difference to employees, Dovey says. Rewarding the exceptional effort of employees in high-stress, highly competitive industries might help when it comes to employee retention.

Richards suggests that employers reward behavior that they want to promote. “It’s generally self-perpetuating. If you want a high-performing workforce that consistently goes above and beyond the call of duty, you should move the bar higher.”

Susan Ladika has been a journalist for more than 20 years, working in both the United States and Europe. Now based in Tampa, Fla., her freelance work has appeared in such publications as The Wall Street Journal-Europe and The Economist .
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