What Is Incentive Pay?

“Incentive pay” refers to any payments issued under a plan or arrangement that provides lump-sum payments to employees based on a measurement of performance within a performance period. For OMERS purposes, incentive pay must be included in the calculation of an employee’s contributory earnings if the payment forms an ongoing part of compensation that the employer reasonably expects will occur on a regular basis.

Reporting Methods

At its April 16, 2011 meeting, the OMERS Administration Corporation Board approved two methods for reporting incentive payments: (1) “year earned,” and (2) “year paid.” This decision allows employers who are using the “year paid” method to continue to do so.

The two methods are exclusive options. In other words, if your current policy is to report incentive pay in the year it is earned (similar to retroactive pay), that policy can continue. If your current policy is to report incentive pay in the year it is paid, the policy can continue. If an employer wishes to change their method from year earned to year paid or vice versa, written permission from OMERS would be required and the change could result in significant retroactive corrections of member records. Examples of the two methods will appear in sub-section 3.1.1 of the Employer Administration Manual on January 3, 2012.

Avoid “Doubling-Up” Payments

If you use the “year paid” method, you should be aware that certain incentive payments received on or after termination or retirement cannot be included in contributory earnings. For instance, if a member receives an incentive payment that applies to 2011 in March 2012, then terminates in June 2012, this payment is included in the contributory earnings for the termination year. However, if the member also receives an incentive in 2013 that applies to 2012, this cannot be included, as there is already an incentive payment included in the member’s 2012 contributory earnings.

Cap on Incentive Pay

Effective January 1, 2011, an upper limit (a “cap”) applies to the percentage of incentive pay that may be included in contributory earnings. This Plan amendment caps a member’s annual earnings for pension purposes at 150% of contributory earnings calculated before incentive pay. Any incentive pay over the capped amount should not be used to determine contributions or to calculate a member’s pension.

While this amendment relates to incentive payments, it does not affect the reporting method you use for incentive pay. However, the application of the cap for the period 2010–2011 requires special consideration. For instance, an employer pays an incentive payment in 2011, but the payment is in respect of 2010 performance:

• If the employer is using the “year earned” method, then the incentive relates to 2010 and is not affected by the cap, which took effect on January 1, 2011.
• If the employer is using the “year paid” method, then the incentive would have to be included in 2011 earnings. Therefore, the employer would need to consider the incentive pay cap when calculating the amount of the incentive payment that would be eligible for inclusion in contributory earnings.

If you have any questions about reporting incentive pay, please contact Client Services.