Employee Compensation Bonus: Non-Cash Bonus for Employees

When the economy is strong and business is really humming, it's appropriate to reward productive workers with salary increases or cash bonuses.

When the economy is strong and business is really humming, it’s appropriate to reward productive workers with salary increases or cash bonuses.

In bad times, however, cash may not be available to spread around. Fortunately, money isn’t the only motivational tool at your disposal. In fact, studies have found that non-monetary compensation is an even more important factor for many people.

The satisfaction that comes from being recognized as an important and valued associate is an extremely powerful motivator for your employees. A new job title that reflects an individual’s increased contributions to the organization, a private office, business cards, a person’s name on the door, the opportunity to attend professional meetings–these are all motivators that cost a company little if anything out of pocket. Yet they can help maintain or even enhance staff morale during troubled times.

In addition, there are also some tangible forms of compensation that you can offer your employees during times when cash is short. One strategy that we urge our clients to consider when money is tight is to offer employees “phantom stock” in lieu of cash bonuses. Unlike regular common stock, phantom stock does not convey any equity in the business. But it does enable the employee to share in any future appreciation in the value of the business.

For example, let’s take the case of a business worth $500,000. The owner issues one share of “phantom stock” equal to 1% of the future appreciation of the business to each of 10 employees. If the value of the business eventually increases to $800,000, each share of “phantom stock” will then be worth $3,000 (1 percent of the $300,000 appreciation).

It’s a good deal for employees because they will have the opportunity to participate in the increased value of the company, and a motivation to enhance the profitability of the business. A phantom stock program is a good deal for the owner, as well, because the business can conserve cash by deferring compensation to a future date without giving away any ownership in the company.

Another technique we recommend is to form an Employee Stock Ownership Plan (ESOP) enabling your workers to earn a retirement nest egg, which will grow as the business prospers. This is another approach that offers employees a real incentive to help the company succeed.

But an ESOP can also be a great deal for the owner of a business. The owner can sell some of his stock in the company to the ESOP, reinvest the proceeds in publicly-held securities, and not pay any tax on the gain until the stock is sold. It’s a win-win situation!

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