Leon Rbibo, co-founder and president of the Pearl Source, in Los Angeles, which sells pearls online, accidently discovered that noncash bonuses speak as eloquently as greenbacks. The 10-year-old firm with annual revenue of $10 million was keen on attracting high-caliber, customer-oriented talent. "We wanted our team members to feel empowered, vested in and committed to the company," says Rbibo. But year-end cash bonuses failed to excite many of the younger workers, who were on the lookout for something else to motivate them.
One night in 2012, as the owners were considering how to bolster enthusiasm among their Millennials, they hosted a dinner for their marketing agency. They invited a young team member who had been working hard as the liaison with the agency. The following day, she arrived at work visibly changed. "She told us how much she appreciated our including her, but we actually saw how she seemed more motivated and confident," says Rbibo. The cost was minimal, but the payback so positive it sparked a change in thinking about rewards. Today the Pearl Source's noncash bonuses include extra vacation days, restaurant meals, and travel. Rbibo prefers both the ease of implementing these bonuses and their informality. "I don't like dangling a monthly award, like a carrot, in front of employees," he says. "Spontaneity works best for us." He's not the only founder newly focused on bonus alternatives.
Keep the taxman in mind
Noncash bonuses awarded to employees are, with a few exceptions, fully taxable as gross income. And don't think about sugarcoating them as gifts. "There's no such thing as a gift from employer to employee," says Robin M. Solomon, a tax attorney specializing in employee benefits and a partner at Ivins, Phillips & Barker, in Washington, D.C. "It's all compensation." The rules, in fact, are simple. You must assign a fair market value to the noncash bonus and include it on the employee's W-2 form. For employers, this amount is tax-deductible. But the complex accounting makes some businesses shy away from noncash bonuses. Moreover, explaining all this to your workers requires delicacy. Says Solomon: "To tell employees you're giving them a big noncash bonus but that it's taxable may take the wind out of their sails."
The upside, Solomon says, is that a taxable noncash bonus may boost the amount a person can contribute to a 401(k).
Tamara Erickson, a professor of organizational behavior at London Business School and the author of Plugged In: The Generation Y Guide to Thriving at Work, sees attracting younger workers with noncash bonuses as a growing phenomenon. "The younger generation tends to put a higher premium on the quality, experiences, and self-growth associated with work rather than money," she says. "These priorities make companies with creative, do-good, and meaningful cultures very attractive to Millennials." To retain them, says Erickson, often a noncash, development-related solution works best, such as allowing them to be part of a joint social-mission project with the participation of senior management.
Krish Himmatramka, founder and CEO of Do Amore, an online wedding jewelry seller with a social commitment to alleviate worldwide water issues, offers team members "clean-water trips" to witness the global water crisis and potential solutions firsthand; he multiplies up to $1,000 of an employee's cash bonus by five, meaning the employee's grand turns into $5,000 worth of company-paid transportation to and accommodations in remote parts of the world. "An employee who better understands what it's all about is more likely to want to continue to work for us," Himmatramka says.
Noncash bonuses customized to align with and excite a worker's creative pursuits are also attractive. "Give your gardening aficionado an instructional course, or send your skiing enthusiast on a trip to the slopes," suggests John Challenger, CEO of global outplacement firm Challenger, Gray & Christmas. "You want your employees to feel you know them, rather than think you presented them with some off-the-shelf gift. It's not about the money, but what's right for them."
If you switch from cash to noncash bonuses, keep in mind that employees may react adversely to your change. Robert J. Bies, a professor of management at Georgetown University's McDonough School of Business and co-author of Getting Even: The Truth About Workplace Revenge--and How to Stop It, says even if noncash bonuses retain the same dollar value as cash bonuses, the announcement of a switch could be perceived as negative news. "Employees form 'psychological contracts' that have to do with expectations and entitlements tied to their job's status, respect, salary, and bonuses," he says. Generational differences can also be tricky to navigate: For people over 40 with bill-paying commitments, cash recognition isn't merely preferred--it's a must.
To help ensure a smooth transition, Bies advises gathering intel first. "Tell your team, 'We're thinking about an innovative approach to bonuses and would like your input,' " he says. "Frame it positively as their gain and in their self-interest, rather than a loss--and then carefully weigh their responses. It's critical to involve them. They're your audience, and you need to know what motivates them."