We’ve all heard the expression, “If it’s too good to be true, then it probably is!”
I’m speaking specifically about prepaid, points-based or award-voucher reward systems. Under these models, the employer is billed on the issuance of the points/award to the employee. They usually look less expensive than the bill-on-redemption models, which charges the employer when the award is redeemed. However, many companies are paying vendors for unredeemed awards sitting in limbo that will never be redeemed by their employees.
When employees don’t redeem awards for various reasons, such as moving to a new company or simply forgetting, the unredeemed points or awards are called breakage. Many employers gross up the value of their employee’s award in order to cover any taxes. When the employee doesn’t redeem the award, the employer not only loses the amount of the original award, but also loses the additional dollars spent to gross up the award to cover taxes. It’s important to understand all of the nuances of breakage and the potential costs.
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Let me be clear about one thing: there’s absolutely nothing wrong with a bill-on-issuance model as long as the terms and conditions are clearly defined in the service agreement, and there are transparent reports.
Full disclosure: my company, Rideau Recognition Solutions Inc., provides both issuance and redemption and models. My experience in the industry has taught me there are five key things employers should do to protect themselves if they decide to use a bill-on-issuance model:
- Determine who benefits from the breakage and by what percentage. Every program will have non-redeemers (employees who never cash in their points or exchange their award vouchers for gift certificates or rewards). These are employees who may have been terminated, have retired or have forgotten about the award. In my opinion, vendors are entitled to a reasonable percentage (five to 25 per cent) of this breakage because the employer and employees have used their software.
- Make sure there is a clearly defined exit strategy when the contract with the vendor terminates. What happens to the funds the employer has prepaid for points or award vouchers when the relationship with that vendor ends? Failure to have an exit strategy that addresses the issue of prepaid funds can lock an employer in with a vendor that they don’t want to work with anymore.
- Protect the prepaid funds for points or award vouchers. Insist that prepaid funds be deposited in a special bank account that’s not co-mingled with the vendor’s funds. Alternatively, have a clause for restricted use of funds added into the service agreement stating prepaid funds can only be used for the purpose of operating the program. Make sure to set out audit rights to ensure prepaid funds are only used to operate the program.
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- Insist on full and transparent reporting. An employer should know the breakage rate and the exact items its employees redeem. Remember, the employer owns the relationship with its employees and the vendor is only the agent. Beware of vendors that claim that they can’t provide the above-mentioned information because of privacy issues.
- Make sure the vendor sends out statements to employees on a regular basis reminding them that points or award vouchers are waiting to be redeemed. Vendors should be doing as much as possible to market unused points and award vouchers to a client company’s employees.
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Points and award vouchers are like promissory notes to employees because it’s only when they are redeemed for tangible items like gift cards, merchandise, travel, etc. that they deliver the real reward value to employees and to the company. When opting for an issuance model “all that glitters is not gold” and employers need to make sure they protect their company from hidden costs.
Peter W. Hart is the chief executive officer of Rideau Recognition Solutions Inc. based in Ottawa.