Have an employee incentive-pay program? Keep these things in mind

Nov 8, 2018

Estimated reading time: 3 minutes

Human hands exchanging money

Governments in Washington must exercise care when creating and implementing programs to compensate employees beyond their base salary.

This article offers items to consider specific to performance-based incentive pay. The following is intended for informational purposes only – always consult your government's attorney for specific legal advice on these matters.

Incentive-pay programs provide monetary or other awards based on meeting certain performance goals. For example, an employee might be challenged to use no sick leave during the year and receive additional vacation leave if that goal is met. There are good reasons to have such programs, such as encouraging and rewarding high levels of performance.

What types of governments may have incentive programs? In 1995, Washington's Attorney General determined that cities and counties may “establish employee awards (in the form of monetary payments or otherwise) as compensation in return for meeting identified performance standards or goals in excess of normal employee performance requirements.” The Attorney General's opinion did not address special purpose districts, which should conduct their own legal analysis.

Who has to approve incentive programs? The governing body should formally adopt any incentive program either by resolution or by ordinance.

For cities and counties that have incentive programs based on performance goals, what are the requirements? According to Attorney General Opinion 1995, No. 13, the programs must meet these criteria:

  • Above and beyond: Performance goals should exceed normal employment requirements typically outlined in a job description. For example, a grant manager should not receive an incentive payment to pass a federal program review, because this would be a normal job expectation for this position.
  • Individually based: Goals need to be specific to the individual's performance. Some governments have entity-wide goals and award incentives to all employees if the goal is met. However, this can be problematic because each employee must have defined expectations as to how he or she will contribute and exceed normal job expectations. For example, if a port primarily leases commercial property and has a goal to achieve 90 percent occupancy, the port must demonstrate how each employee is expected to contribute to this goal. This might be difficult to do for positions not directly involved with property leases, such as the accounts payable clerk or janitor. This does not preclude entity-wide goals, but governments should document how each employee who might qualify for an incentive award will contribute to the goal and exceed normal job expectations.
  • Established before the performance period begins: The criteria and expectations for exceeding normal employment requirements and earning additional compensation must be both documented and communicated to the employee before work is performed. In other words, when the employees are working hours that could lead to incentive pay, they must know they're working toward the possibility of receiving the incentive pay.
  • Measurable outcomes: Governments should establish a measurable outcome or outcomes upon which to evaluate whether the employee attained the goal. For example, if the goal is exemplary customer service, this might be measured with client satisfaction survey results.

From the perspective of the Auditor's Office, governments should maintain documentation demonstrating compliance with these requirements. This documentation will be relevant if an audit looks at the area of payroll and compensation. If questions or issues arise regarding incentive programs, governments should consult legal counsel.