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Compensation  >>   Lump Sum in lieu of Merit - benefits eligible? amount? Search Discussion Posts
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Private12736

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 10:39am   877 Views
   (1 rating)

For organizations that use lump sum payments in lieu of merit, do you typically award a percent of base pay equal to a merit amount, or less?  In a market-based comp system, with maximum job values built into the structure, an employee is presumably capped out for a reason.  What would the argument be for paying an amount equal to a merit increase rather than a reduced amount? For instance, would you pay a 1.5% lump sum when others, under the max, might get 3%? 

And one more question, are these payments generally (if not always) considered "salary" for benefit plan purposes - 401(k) contribution/match, pension, etc.  Is there any impact to life insurance based on a factor of base pay?  
Thanks for your thoughts!


Private10775

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 11:14am  
   (1 rating)

Margaret,

In the pay-for-performance matrix contained in this WorldatWork Journal article, we pay the percentage award as a salary increase.  Any amount impacted by the grade maximum has the balance converted into a lump sum payment. 

We took this approach so we could provide the full percentage award for the performance, regardless of where a person's salary is in the grade.

In our organization, lump sum payments are not used for benefit calculations (except of course Social Security and Medicare).  But that doesn't have to be the way it is in other organizations.  Frankly, I'd like to get our organization to change its policy to allow lump sum payments to be used when calculating benefits.  It might reduce some of the employee resistance to lump sum payments, especially in these days of small base salary growth.

Paul 


Private10790

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 11:15am  
   (4 ratings)
  1. Neither.  Lump sums as a percentage of standard job value (i.e., midpoint or current market/internal target norm) provide more equitable distributions without the dysfunctional compounding effects of applying flat percentages to varying base amounts; there is thus no prejudice for/against prior years' pay history (the poor don't stay poorer).
  2. Maxes do not necessarily imply a reason but merely prove the existence of a cap.  Frequently, they are simply the reciprocal of the minimum, a rate as far above the midpoint as the minimum is below the midpoint, a flip-side symmetry imposed because it looks neat and tidy to anal minds, without any other logical justification.  Caps are useful as brakes on otherwise infinitely compounding salaries, although it is best practice to use them as triggers requiring additional approval levels rather than as arbitrary ceilings; because they really can't be rationally justified as "the correct magic maximum number."
  3. A merit increase to base pay is (in the words of Jay Schuster) the gift that keeps on giving forever because it compounds and accrues perpetually.  A bonus or other lump sum award is harder on cash flow (all is expended immediately rather than trickled out) but adds to the employee's total income once, is more noticable and is theoretically independent of the base.  (I quibble, theoretical, because the best predictor of the next bonus amount is the amount of the last bonus amount awarded.)  Anyway, a salary increase of 3% is perpetually folded into each year's earnings forever and ever, while a 5% bonus is here today and gone tomorrow.  A same-% bonus can be justified as less costly over time and more dramatic than the same% in a merit bump which may be hardly noticed but costs more for as many years as the employee remains here; or, alternately, you can argue that the same% bonus is "too much" because of its immediate cash drain on your scarce payroll bucket or profit pool and the lucky recipient might quit next week leaving with all their already-received cash.
  4. The impact of lump sums on benefits depends essentially on your specific plan contract provisions.  For ours, there is no impact on life, since it is a flat amount for all employees; but in most of my corporate lives, it was classified by base salary brackets.  Our 401(k) is based on pre-tax earnings, so that would be the total W-2 number each year (usually affected more by lump sum awards).

Private34235

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 11:31am   Revised: 02/04/2010 11:32am  
   (1 rating)

From Ann Bares' Compforce blog:

In most of the situations that I have encountered, the amount of the lump sum merit award is identical (as a % of base salary) to what the employee would have earned via the guidelines if they were still within the confines of their salary range.  In other words, if the merit increase guidelines suggest a 3% increase, the employee receives a lump sum award equal to 3% of their current salary.  I have seen a couple of situations where the lump sum award is reduced from that level suggested by increase guidelines (i.e. 50% of the amount suggested by guidelines).

http://compforce.typepad.com/compensation_force/2008/06/quickie-primer.html

Where I have worked, we didn't have enough ees at or near the max, so changing our benefit programs ( e.g., 401(K) and life insurance plans) to account for the lump sum was not justified.


Private11192

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 02:03pm  
   (4 ratings)

I would not include the lump sum as being eligible for incentives or other base pay calculated amounts.  IMO the whole point of doing lump-sums is to avoid the other costs associated with increasing base salaries (increased incentive targets, 401(k) matches, taxes, benefits, etc.).


Private10775

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 02:20pm  
   (1 rating)

Ryan,

Yep, there are a lot of people in my organization who feel the way that you do.  But do you mind a little debate here? 

To the extent that companies use lump sum payments as an alternative to base salary increases, there is an even greater cost savings from lump sums than just the benefits roll-up costs.  Its the elimination of compounding from salary increases - or as Jim Brennan mentioned, "the gift that keeps on giving." 

So wouldn't the added cost of adding benefits to lump sum payments be a small price to pay compared to the major cost savings accrued from replacing salary increases with lump sum payments?

Thanks for the discussion on this issue.

Paul


Private10790

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 02:43pm  
  

Other reasons for lump-sums are

  • immediacy... you give it to them right now rather than wait for anniversary or common focal date
  • closure... during rocky economic times, if you don't expend it today, the budget pool may not be there tomorrow
  • impact:  they get a bucket-full of cash to expend all in one big splash rather than dribbled out or diffused in a dewy shower
  • shifting topic windows (you clear the slate from THIS incentive and shift focus to a DIFFERENT focus)
  • psychological association and reinforcement power (all of the above)

but unless you pay them illegally under the table, you can't evade the associated taxes... and some benefit plans require comparisions with total W-2 earnings figures (which will include lump sums and commissions and bonuses and other cash pay elements) rather than simple guaranteed annual salary or base hourly wage.


Private34235

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/04/2010 03:23pm   Revised: 02/05/2010 09:27am  
  

Which employee benefits do you have in mind, Paul?

 

 


Private10775

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/05/2010 06:16am  
  

Frank,

In my organization, the benefits that don't get rolled up as a result of lump sum payments are retirement, savings, life insurance, and the several varieties of leave benefits.

(Health insurance also does not get rolled up as a result of lump sum payments, but it doesn't get rolled up with salary increases either.) 

Perhaps it doesn't make sense to raise leave benefits as a result of lump sum payments; but certainly one could make an argument that retirement, savings and life insurance benefit levels could be raised along with the company and employee contributions to cover the increased benefits. 

What do you think of the idea?

Paul


Private34235

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/05/2010 01:24pm  
   (1 rating)

It is a one-time payment, so having it affect life insurance which continues beyond the year of payment is inconsistent and a major book-keeping effort. Personally, as an employee, I wouldn't expect it to impact life insurance.

The savings plan contribution and match effect seem ok to me. It's a one time deal and it not too complex a process to make it happen.  I don't know how your retirement plan works, but if it is not too complex a process, I guess it is ok as well.

The bottom line is that each company should make their own determination. Having it affect benefit plans seems bureaucratic and the kind of thing to avoid to operate a streamlined operation without a bunch of special exceptions that add complexity and cost.


Private10963

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/09/2010 11:15am   Revised: 02/12/2010 01:40pm  
   (3 ratings)

Interesting discussion on the question of whether lump sum payments should be benefits eligible or not.  I would only add that, in most cases, the answer to this question will be found in your existing benefit plan documents.  Your benefit plan documents should already contain a definition of compensation, determining what is or is not included.  If that is not consistent with your preference, a revision of your plan documents would be necessary prior electing to pursue a different treatment for lump sum payments.

The views expressed on this site are mine alone and do not necessarily represent the views of my employer. My employer has not reviewed or approved any of its content and accepts no responsibility for my post.


Private21463

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/09/2010 09:33pm  
  

In Indonesia our Labor Law defines the Wage and determines what components can be considered "benefit bearing" for the purpose of the payment of End Of Services Benefits. Said components are fixed Allowances which are defined as Allowances that are paid regularly. As such lumpsum will not be included in the above components.  


Private10905

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/10/2010 12:00pm   Revised: 02/10/2010 12:01pm  
  

The majority of my clients award a lump sum merit award that is equal to the marit amount.  From my perspective, you want to award an equivalent merit award (based on performance) without raising them above the maximum of the salary range. 

Obviously, if a company has a significant amount of employees in this situation - there may be job classification or pay range issues.


Private11647

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/10/2010 03:30pm  
  

I think I'd go along with the theme that savings contributions (401k, 403b, etc.) should be benefits bearing on lump sum payments.  I'm not sure from the perspective of income protection, that life insurance should be calculated on the basis of earnings from lump sum payments.  Interesting discussion, although I'm not sure why Jim's earlier contribution, which I thought was pretty good, was apparently deserving of 1-rating?  Seemed like at least a 2-rating to me, and seriously - probably higher than that.  I guess we need to add lump sum payments to the same category as politics and religion, as topics to steer clear of?


Private10790

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/10/2010 04:48pm  
  

Nah... I don't take it that hard.  Last time I got one of those, the guy called me to apologize that he mistook the rating scale and erroneously selected 1, thinking that was the highest rank, so I'll take comfort in that illusion.

Cool


Private17969

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/12/2010 01:54pm  
  

We currently don't use lump sums, but I will be exploring it in 2010.  I have a follow-up question ... how do you handle overtime calculations for lump sum merit payments?  Do you need to recalculate overtime hours from the prior year or do you consider this part of the regular rate when overtime occurs during the following year?   Any chance you don't need to factor this into overtime?


Private10775

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/12/2010 02:04pm  
  

Amy,

Yes, non-exempts who get lump sum payments very likely will have to have their overtime pay rolled into the calculations somehow.  I believe Frank Giancola has pulled down FLSA regulations on this in previous posts.  Place some key words in the Search box in the left-hand margin, or above the discussion string, to find those previous posts.

Paul


Private34235

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/12/2010 02:15pm   Revised: 02/12/2010 02:16pm  
  

Amy,

Don't actually know the answer. Here is how one organization handles it:

http://www.spa.ga.gov/pdfs/compensation/cb.pbi_polcy.03b.pdf

Ask the question at this law blog for an opinion. Also note the references to the federal law shown on the page I referred you to below:

http://www.palaborandemploymentblog.com/2008/06/articles/wage-hour/bonus-and-other-lump-sum-payments-to-nonexempt-employees-may-impact-overtime-calculations/

You can always ask your regional DOL office or an employment attorney

Frank


Private10963

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/16/2010 10:27am   Revised: 02/16/2010 10:37am  
   (1 rating)

If the lump sum payment is calculated as a percent of pay recieved (including overtime), I believe you can avoid recalculating past overtime and still be in FLSA compliance.  I would certainly consult an employment attorney prior to implementing any new program of this type.

Steve

The views expressed on this site are mine alone and do not necessarily represent the views of my employer. My employer has not reviewed or approved any of its content and accepts no responsibility for my post.


Private34235

   
Lump Sum in lieu of Merit - benefits eligible? amount?  
Posted: 02/22/2010 10:01am  
  

The latest issue of the W@W Journal has a article on lump sum merit increases that thoroughly discusses the pros and cons of the approach, including the effects on benefits:

The Mixed Value of Using Lump Sums in Lieu of Putting Merit Pay into Base Pay http://www.worldatwork.org/waw/adimLink?id=36476


 
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