Companies Recoil From Incentive and Rewards Trips

By Datwa Morales

Jul. 1, 2009

It was not a good day for the rewards and recognition industry when the news broke last October that American International Group, despite having just been bailed out by the government, had sent its top-producing employees on a $440,000 reward trip to the St. Regis Resort in Southern California.

Things didn’t get better in February, when word leaked out that Wells Fargo, another recipient of the government’s Troubled Asset Relief Program, had scheduled a four-day recognition event for a group of its top-producing home loan officers and their guests at the Wynn Resort and Casino and its new sister property, Encore, in Las Vegas.

Although that trip and other Wells Fargo recognition events for 2009 were canceled, CEO John Stumpf took out a full-page ad in several major newspapers to defend the bank’s actions. But the chips kept falling in what the rewards and incentive industry now calls “the AIG effect” that has now spread outside of the financial services community to non-TARP-funded companies. Experts agree that companies are canceling their events based on fear of bad publicity.

“There’s been a knee-jerk reaction across the board,” says Eric Mosley, CEO of international rewards and recognition provider Globoforce. “Company meetings were definitely affected. They got the double whammy. Now there’s a certain amount of shame attached to it.”

Group rewards travel—corporate junkets that are a combination of education and recreation—was standard fare at many major companies until the recession hit, but it has taken a nose dive. The hospitality and travel industries, as well as the employee recognition providers that organize these trips, have been negatively affected by the fallout as major corporations such as AT&T and Hewlett-Packard have restricted all travel to hot spots such as Las Vegas and Hawaii.

“Companies that have received taxpayer assistance must be held to a different standard and conduct their business in a transparent and responsible manner,” says Roger Dow, president and CEO of the U.S. Travel Association, in a statement issued by the organization. “But the pendulum has swung too far. The climate of fear is causing a historic pullback, with a devastating impact on small businesses, American workers and communities.”

Blue Cross Blue Shield of North Dakota pulled rewards trips out of its compensation package for sales representatives after it became public that the health provider sent more than 30 employees and their families to Grand Cayman as a reward in March. A company spokeswoman explained to The Forum newspaper of Fargo-Moorhead that the $250,000 rewards trip, earned by individual employees based on performance in 2008 and paid for by the company in 2007, was figured into employees’ annual salary and each recipient paid taxes on the trip. But the explanation did not spare president and CEO Mike Unhjem from scrutiny, and he was fired a week later. The insurer has raised its rates on group policies twice in two years, with the most recent, a 7.7 percent increase, taking effect on July 1.

According to the USTA, 20 percent of U.S. companies have canceled meeting and event travel, which includes trips given to employees as performance-based rewards. The travel association has a list five pages long and growing of high-profile companies such as IBM that have canceled some or all of their employee travel, along with other meetings and special events, taking a bite out of the $240 billion business travel industry. At stake are 247,000 travel-related jobs expected to be lost this year, the association reports.

“The meetings, events and incentive travel industry has been demonized by negative public perception in the wake of the AIG effect,” says Christine Duffy, president of Maritz Travel, the unit of employee recognition provider Maritz that handles meeting, event and incentive travel for Maritz clients. “We’ve already seen significant layoffs in the group travel industry.”

Duffy’s company hasn’t been spared. In April, Maritz, which had nearly 4,000 employees in four countries, laid off or offered voluntary retirement packages to 460 employees companywide, including at least 30 from Maritz Travel, which is reporting a 20 to 25 percent decrease in travel business this year. The Maritz portfolio includes key clients in the banking and automotive industries, such as Wells Fargo, Citigroup-Smith Barney, General Motors and Chrysler.

Some companies proactively decided to forgo annual incentive trips but didn’t leave their top producers empty-handed. Citigroup, which also received a TARP bailout, gave $3.5 million in debit cards to 2,000 high-performing advisors in its Smith Barney brokerage, and $9.5 million in monetary awards to 1,900 agents in its Primerica Financial Services division, to compensate for canceled trips. Allstate refused TARP funding but wiped out all employee and agency recognition trips for the year. Spokeswoman Laura Strykowski says the company is planning other ways to recognize its employees and independent agents this year, but declined to elaborate.

“We made changes to reflect concerns customers voiced to us,” Strykowski says. “Allstate is still committed to recognizing our employees, and there is not one standard way we do it. But we’re doing so in a more sensitive way in consideration of what our customers and clients are going through in this economic climate.”

Conversely, Wells Fargo has canceled all recognition trips for the remainder of the year and employees will not be receiving any form of monetary awards to compensate for the trips they earned, says Melissa Murray, spokeswoman for Wells Fargo. In prior years, the bank established a reputation for lavishly treating its top performers and their guests to exotic events such as helicopter tours, horseback rides in Puerto Rico, and private concerts with headliners Cher, Jay Leno and Jimmy Buffett. In February 2008, the company flew 1,000 home loan officers and guests to the Bahamas, where Buffett performed.

Even companies that haven’t received TARP funds are being more prudent with how they reward their employees. IBM, which has been recognized by the travel industry for delivering standout conferences and incentive trips, is replacing its sales and incentive events with cash bonuses, American Express gift cards or traveler’s checks, depending on the country, to top achievers who would have earned those perks, according to IBM spokesman Clint Roswell. Employees will be able to choose their award, he says.

“IBM instead is giving their employees what they want—cold cash—because that’s what they said they need in today’s tough fiscal climate,” Roswell says. “It reflects our employees’ desire for increased flexibility, while recognizing a climate in which many businesses face sobering economic news.”

Previous IBM incentive trips varied by region and relationship to the company. The “Know Your IBM” incentive program for indirect distribution channel partners, for example, offers resellers and distributors a world of destinations available to them, such as Morocco for European partners and Thailand for partners based in Asia, and also included an optional philanthropic excursion with each trip. A “Beatlemania”-themed party at the Fairmont Southampton Resort in Bermuda for 1,800 employees and their guests recognized members of the Golden Circle, who represent the top 1.5 percent of IBM’s sales and service staff.

Brenda Anderson, executive director of Site (formerly the Society of Incentive Travel Executives), says that cancellations were as high as 35 percent in January but have leveled off. “Now we’re seeing postponements, where companies are delaying their recognition events until later in the year.”

Most recognition providers offer some incentive travel as part of their rewards program. “Our customers have seen individual travel options as a great enhancer of reward options to make an employee recognition program more impactful,” says Michael A. Fina, vice president of the employee recognition company Michael C. Fina.

But Fina cautions that there are tax consequences for both the company and the employee when handing out rewards with monetary value. Under Internal Revenue Service rules, he explains, gift cards for cash are treated the same as cash awards. Both are taxable income. “Once it falls into the category of taxable income, then it’s considered compensation,” Fina says. “So either the company pays the taxes due on such a reward or the employees do.” To have employees pay on a reward, Fina says, “is demotivating. Who wants to pay for what should be a gift?”

“Best practice is, the company pays, which means the tax must be factored into the recognition budget. Then, it becomes a payroll matter,” Fina says.

Globoforce’s Mosley contends that incentive trips are highly motivating rewards for employees to attain, which produces results that benefit employers.

“If, for example, a salesperson in your company reaches the President’s Club level for being the top salesperson on the East Coast, and the reward is a trip, and he’s met the requirement, then why wouldn’t you give him the trip if he’s meeting the target that was set? He earned it,” Mosley says, “In fact, you want to increase such rewards because you need more sales right now.”

Noncash incentives are two to three times more effective at motivating employee performance and companies spend less on incentive travel than on cash compensation, according to a March 4 report on the value of meetings issued by Meetings Mean Business, a coalition of reward and incentive, travel, meeting and conference providers that have united to fight the fallout. Recognition provider Maritz, along with Marriott, led meetings in March between the coalition, congressional leaders and President Barack Obama over the issue.

“In the short term, this crisis is dealing yet another blow to an already struggling industry and economy,” Maritz Travel’s Duffy says. “In the long term, companies that can’t have meetings, events or performance incentive programs are going to see their performance lagging behind those who do. It’s going to take much longer for them to recover, and it will put them at a competitive disadvantage.”

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