Can Head Start programs pay bonuses?

Bonuses – can we pay those?

Many people don’t realize that Head Start programs can pay incentive compensation – or bonuses – to employees.  Under the cost principles of the Uniform Guidance, incentive compensation is allowable if it meets certain criteria.

Before we get into the rules on incentive compensation, it’s important to first understand what incentive compensation is.  Incentive compensation is extra pay that rewards good performance by employees or the organization as a whole.  It can be used to reward cost containment or efficient performance, for example.

Incentive compensation is not extra pay given to employees without regard to performance, such as a holiday bonus.  In fact, the Departmental Appeals Board has found that payments akin to a “Christmas bonus” were unallowable.

Incentive compensation is allowable if

  • overall compensation is reasonable and
  • there is an agreement or established plan to pay the incentive compensation.

45 CFR §75.430(f).

The first requirement is that overall compensation must be reasonable.  Overall compensation includes all remuneration to an employee, including wages, salaries, incentive compensation and fringe benefits.  To determine whether overall compensation is reasonable, government regulators look to a variety of factors.  If a program has activities other than those funded by federal grants, overall compensation may be considered reasonable if it is consistent with what the program pays for similar work in those other activities.  Overall compensation may also be reasonable if it is comparable to the compensation paid for similar work in the labor market in which the program competes.

Obtaining a wage comparability study is helpful to show that overall compensation is reasonable.  A wage comparability study reports on the wages, salaries and benefits that are paid by other organizations to personnel holding similar job descriptions or job classes.  If you plan to implement an incentive compensation policy, you may want to obtain a wage comparability study and include an analysis of incentive compensation – how it is paid in your labor market and how it can be used as a tool to incentivize good performance and retain employees.

The second requirement is that the incentive compensation must have been paid or accrued pursuant to an agreement or an established plan.  The agreement or plan should be established prior to the year for which the incentive compensation will be paid.  The purpose of the requirement to have an agreement or plan is, in part, to ensure that the bonuses are truly incentivizing good performance.  If employees don’t know about the possibility of incentive payments, then it will be difficult to contend that the incentive payments were meant to encourage better performance.

With this purpose in mind, it is strongly recommended that your program draft a written policy regarding incentive compensation.  The incentive compensation policy and accompanying procedures should be approved by the Governing Board and Policy Council.  As with any personnel policy and procedures, you should make sure to involve your employment or labor lawyer in drafting and reviewing the policy and procedure.

You must also follow the written policy and procedures closely.  Any deviations may cause incentive payments to be questioned or disallowed.  As a result, you should make sure to include a variety of stakeholders in the process for determining incentive payments, including your human resources managers and other leaders.

In today’s climate, incentive compensation can be a useful tool to encourage superior performance and to retain employees.  However, programs should scrutinize their incentive payment policies, procedures and practices to ensure compliance with the law.

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