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Promoting, protecting, and researching the optimal use of incentives, corporate gifts, rewards, recognition, promotional products and related promotions in business.
Current Legal/Legislative Updates
Employee Achievement Awards Exclusion Survives in Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act passed both the U.S. Senate and the U.S. House of Representatives, albeit with two votes by the House due to some procedural matters, and was signed buy the President before Christmas.
The incentive, recognition and corporate gifting industry is a fortunate recipient of the support of several elected officials who listened to and agreed with industry leaders that the tax exclusion afforded Section 274(j), Employee Achievement Awards of the IRS Code, should remain law and not be repealed as was contemplated by the House of Representatives just a few months ago. Additionally, clarifying language defining tangible property for purposes of instructing what constitutes a tax deductible award was inserted into the bill by the Senate. The language is summarized as follows:
“The Senate amendment adds a definition of “tangible personal property” that may be considered a deductible employee achievement award. It provides that tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. No inference is intended that this is a change from present law and guidance.”
The Incentive Federation worked hard this year to monitor the tax reform actions of Congress and to keep the IFI members and other companies in the industry informed. We lobbied, encouraged members to write letters and make calls to elected officials, and contacted Senators and Representatives directly. However, the Federation cannot take all the credit for saving 274(j) from repeal, as it was largely the efforts of IFI member companies and industry leaders that achieved the success.
In particular, the Federation wishes to give a special thank you and acknowledgment to O.C. Tanner, a Utah-based recognition and performance improvement company. O.C. Tanner has been in a unique position to educate and persuade some key elected officials, and in particular Senator Orin Hatch (UT), who chairs the Senate Finance Committee. Senator Hatch was a strong and influential proponent of the provisions within 274(j), and he became a proponent largely due to O.C. Tanner’s relationship with the Senator over many years.
On behalf of the IFI Board of Directors the Federation also wishes to thank all individuals who responded to our call for contacting elected officials by writing letters and making calls. The success we’ve had keeping a valuable and important tax exclusion for our industry’s companies and their business clients was clearly a joint effort. Thank you all.
As we enter the new year we wish all of you a productive and rewarding 2018.
Please click on the Legal/Legislative/Regulatory tab above to see all the other issues the Federation followed and reported on this past year.
U. S. Federal Regulations and Non-Cash Awards
In 2017, to develop a baseline understanding of the awareness, understanding, and
accommodations of U.S. businesses regarding regulations impacting reward and recognition
programs, the Incentive Research Foundation launched its inaugural Regulations Signature
Study, with results released in January 2018. The research examined program owners’ understanding of the regulatory environment, generally as well as in relation to six key regulations1 (DOL Fiduciary Rule, 274j, OSHA, FLSA, Fair Market Value, and Sweepstakes/Lottery).
The survey was designed and executed by Intellective Group during the summer of 2017 to a cross-section of 419 businesses, 106 operating in the financial services sector. Program owners were targeted based on sector and revenue size: $5 – $9.9 million, $10 to $99 million, $100 to $999 million, and $1 billion or more. The findings are weighted by revenue size, and are statistically representative of the population of U.S. businesses with a 95% confidence level and a 5% margin of error.
General Understanding of Regulations
Most program owners understand their reward and recognition activities are impacted by the
regulatory environment, but aren’t really sure how. While 67% of program owners are aware there are regulatory considerations for their programs, only 38% consider themselves very knowledgeable about those regulations and tax requirements. For the smallest businesses surveyed ($5 – $9.9 million in annual revenue), awareness drops by ten percentage points to 57%.
Despite this, program owners are confident that their companies have identified and addressed any relevant regulations. Only financial services firms and small businesses indicate lower confidence – specifically regarding a detailed understanding of the requirements and the consequences of non-compliance. Regardless of their confidence, fewer than two-thirds of U.S. businesses have formal mechanisms and structures in place to ensure their programs remain compliant with regulatory and tax requirements. While the program owner has some responsibility for compliance, many also look to their legal or compliance teams for guidance, particularly in large firms (over $1 billion). The most common structural oversight tool is regular reviews of non-cash programs, with 62% of businesses using this as a compliance device.
Program Design Changes
Reward and recognition programs are not static – 86% of U.S. businesses make some revision to their program on an annual basis. This is true across all business sizes and all sectors. And there is no one type of program change that rises above the others; sometimes it’s a revision of the rules, sometimes it’s the reward selection, sometimes it’s a simple revision to the language used to describe the program. The regulatory environment plays two roles in program design – it provides a potential impetus for revision of the program, and it informs the design and approval of those revisions.
In 2017, 93% of U.S. businesses made at least one change to program design based on the regulatory environment. Half of U.S. businesses made eight or more changes for this reason. There are no differences by business size or sector, meaning small businesses, despite their relative lack of knowledge and certainty, are still making an effort to meet the compliance requirements for their programs.
The most common design revisions are to general program design (87% of businesses) or program communications (85%). Specific changes made by at least 40% of U.S. businesses to address regulations include:
- Underlying business purpose of the program
- A complete redesign of the program (especially financial services firms)
- Changing the rewards mix (especially financial services firms)
- Changing the name or description of the program (especially financial services firms)
- Editing the language used to communicate the rules (especially financial services firms)
- Changing the products included in a sales or channel incentive program
- Changing cash rewards to non-cash (especially financial services firms)
- Redesign of group incentive travel events (especially financial services firms)
- Increased scrutiny on program statistics
- Increased scrutiny on program accounting (specifically W2s and 1099s)
- Increased program budgets to pay for these changes (especially financial services firms)
Financial services firms were more likely than their counterparts to be making some additional changes:
- Outright elimination of a program
- Shift rewards from gift cards to other non-cash rewards
- Shift rewards from cash or non-cash to other intangible rewards
- Increased scrutiny on program outcomes, including ROI
- Increased staff support to accommodate regulatory environment
The largest and smallest firms have specific areas of particular focus. Small businesses are the most likely to be shifting from cash rewards to non-cash (and driving the continued increase of non-cash reward use in the U.S. market), while large firms are more likely than small and midsized businesses to be doing the following:
- Redesigning a group incentive travel event
- Outright elimination of a reward and recognition program
- Revising the name or description of a program
- Increasing staff support to accommodate regulatory compliance
When asked about their awareness and understanding of specific regulations, program owners respond consistently across the various regulations:
- A high level of awareness of that regulation, but a much lower level of knowledge about the specific requirements for compliance
- Although larger firms report awareness and knowledge, the drop-off between awareness and knowledge is similar to that of their counterparts.
- Small businesses report lower awareness, very low knowledge, and are the least likely to feel any given regulation is clear in its requirement for compliance.
Despite these patterns, it is not the largest or the smallest firms that find it most challenging to remain compliant. That distinction falls to mid-sized firms, those with between $100 million and $1 billion in annual revenue. It’s likely these firms have grown to a size that indicates significant complexity in their organizations, and therefore their programs, without the hardwired compliance mechanisms found in the Fortune 500.
During analysis, it became clear that there were some underlying patterns in the data that couldn’t be explained by firm size or sector. A segmentation of respondents using cluster analysis was performed, resulting in the identification of two key and distinct types of program owners:
- “Absolutes” are assured in their awareness, understanding, and accommodation of regulations. They are somewhat more likely than their counterparts to be executives operating in larger firms, but are present at every management level across all business sizes and sectors. Their firms typically have more structures in place to address the regulatory environment. Despite (or maybe because) of their knowledge and responsibility, they find it ‘extremely challenging’ to remain compliant with regulations.
- “Abstracts” are comparatively less confident about regulations (both generally and specifically), what the requirements are, and their own ability to achieve compliance for their programs. They do not feel knowledgeable about regulations and aren’t even sure if various regulations apply to their programs. They have fewer mechanisms in place to address program compliance, and, perhaps because of their uncertainty, find maintaining compliance only ‘moderately challenging.’ Like their counterparts, they are found across all management levels and within all sizes and sectors of business, although they are somewhat over-represented in smaller firms.
These two segments are equally prevalent in the U.S. business market – Absolutes account for 55% of program owners, while Abstracts account for 45%.
The regulatory environment and its consequences for non-cash reward and recognition programs are not well-understood by a large proportion of those responsible for operating these programs.
Many program owners find regulations unclear and challenging to accommodate, but are making numerous changes to their programs in an effort to comply. Financial services and small businesses, in particular, struggle with understanding what regulations mean for their programs and how to best address these requirements.
2016 Incentive Marketplace Estimate Research Reports 17% Growth Since 2013
Conducted in partnership with market research firm Intellective Group of St. Louis, the study measures the expenditures of businesses for non-cash rewards for employees, customers and partners. The results update studies from previous years and provide details about expenditures spent on gift cards, rewards points, travel, and merchandise by corporate America. New this year, the study also focuses on the number of program owners using award points.
The study of a cross-section of US businesses confirms that award points, gift cards, incentive travel, and merchandise are commonly-used tools for firms seeking to reward and recognize their employees, sales teams, channel partners, and customers. Key findings from the study include:
• 84% of U.S. businesses use non-cash rewards to recognize and reward key audiences in the form of award points, gift cards, incentive travel, and merchandise – up from 74% in 2013
• In 2015, U.S. businesses spent $90 billion on these types of non-cash rewards, a 17% increase from $77 billion in 2013. To see the full research report click here.
Additional inquiries may be sent to IFI’s Managing Director, Steve Slagle.
2015 Incentive Federation Program Design and Support Study Released
IFI engaged Intellective Group of St. Louis to conduct its 2015 Program and Design Study. Using a national sample of business stakeholders with at least $1M in revenue, the study aimed to determine the drivers of programs, award types, supplier use and program metrics. The full study may be reviewed here. Additional inquiries may be sent to IFI’s Managing Director, Steve Slagle.
2015 Incentive Federation Program Design and Support Study Waterfall Release #1 – Program Goals and Objectives
IFI has released the first of a series of white papers on its 2015 Incentive Federation Program Design and Support Study. In this white paper, the Federation focuses on an in-depth analysis of program goals and objectives companies strive to achieve when designing an incentive program. Review the Program Goals and Objectives white paper here.
2015 Incentive Federation Program Design and Support Study Waterfall Release #2 – Communication, Technology and Tools
IFI has released the second of a series of white papers on its 2015 Incentive Federation Program Design and Support Study. In this white paper, the Federation focuses on an in-depth analysis of how companies utilize communication, technology, tools and reporting within their incentive programs. Review the Communications, Technology, Tools & Reporting white paper here.
2015 Incentive Federation Program Design and Support Study Waterfall Release #3 – Award Program Spending
IFI has released the third in a series of white papers on its 2015 Incentive Federation Program Design and Support Study. In the latest release, IFI puts the spotlight on program spending. Click here to learn more.
2015 Incentive Federation Program Design and Support Study Waterfall Release #4 – Engaging Outside Program Support
IFI has released the fourth in a series of of white papers on its 2015 Incentive Federation Program Design and Support Study. In the latest release, IFI puts the spotlight on engaging outside program support. Click here to learn more.