William Edwards                                           Revised September 2006                 Iowa State Extension economist        515-294-6161 wedwards@iastate.edu

Motivating and rewarding employees is one of the most frequent concerns voiced by farmers who hire full-time labor. Besides a basic wage or salary, many employers offer an added bonus or incentive to encourage good job performance.

There are almost as many types of bonuses as there are employers. In two surveys by Iowa State University, farmers with full-time employees were asked to describe bonus plans that they used. In the most recent survey over 43 percent of the employees were paid some type of bonus. The value of the bonus payment ranged from $50 to $9,658, with the average value being $2,192. Most of the plans were based on one of four factors: volume, performance, longevity, or profitability.

Volume

The most common bonus mentioned was a fixed payment per unit of output from the farm. Hog farms commonly paid from 50 cents to $2 per pig weaned or sold. This guarantees that the employee’s wages increase when the volume of production and the work load increase. Improved efficiency, such as more pigs weaned per litter, is also rewarded, although at a modest rate.
Other bonuses based on volume included a fixed payment of $1 to $2 per acre for crop farms, $5 per calf sold, or a bonus for each cow milked in a dairy herd. Typically these bonus plans amounted to $500 to $2,000 annually per employee.

Performance

Some hog operations put more emphasis on performance by paying employees a bonus of $1 to $2 per head for each pig weaned over a specified average per litter, or per sow per year. This provides a much stronger incentive for carrying out the extra duties or late hours necessary to save more pigs. This type of bonus is effective only when the employee has direct responsibility over the factors on which the bonus is based. For grain farms, for example, bonuses based on crop yields are difficult to implement fairly since yields depend on many factors beyond the employee’s control.

Another type of performance bonus is a lump sum paid at the end of the year based on the employer’s overall assessment of the employee’s work. Although this involves less record keeping, the amount paid becomes very subjective. If the bonus is less than was paid the previous year it may actually become a disincentive to the worker. Performance bonuses should be paid soon after the work is performed to have the greatest positive effect.

Longevity

Some employers pay a bonus for each year the employee has worked on the farm, such as $200, or 1 percent of the normal wage. This recognizes the value of experience and continuity to the farm.
For newer employees, paying a bonus simply for completing the year or staying through harvest avoids the problem of frequent turnover or being shorthanded at critical times. Bonuses of $200 to $2,000 at the end of the year were commonly reported. Some employers pay an extra month’s salary as a holiday bonus.

Profitability

Bonuses based on the profitability of the farm or a particular enterprise allow the employee to share in some of the financial risks and rewards of the business. Control of key expenses such as machinery repairs also can be the basis for a bonus. Long-time employees may be more willing to be paid on this basis than new employees.

If the bonus is calculated as a percent of net income or profits, then the employer must be willing to share this information with the employee. In many cases, the bonus is simply a lump sum based on the employer’s discretion. For example, if the farm has a “decent year.”

In-kind payments

Employee bonuses do not always have to be paid in cash. A new appliance, a gift certificate, or a paid holiday at a resort may be highly appreciated, especially by the employee’s family. Some employers allow workers to use tools, shop space, vehicles, livestock buildings, and even crop machinery for personal enterprises. This benefit involves little or no extra cost to the employer. Some bonuses are paid in the form of commodities. Current tax laws do not subject payments to employees in the form of commodities to Social Security tax.

A good bonus plan needs to be discussed in advance. If performance or profitability determines the amount that is paid, an example should be worked out so that both parties understand the procedure to follow. However the incentive plan is structured, the expectations and conditions need to made clear to the employee, and strictly followed by the employer.

Following is a list of all the bonus plans reported in the last two surveys.

Bonus and incentive plans for Iowa farm employees
(1991 survey is in italics)
(1998 survey is in normal type)

Swine

• $3.50 per pig sold (total wage) 
• $1 per pig sold ($12,000) 
• $.50 per pig sold ($6,000) 
• $.25 per pig produced ($3,600) 
• $.10 per pig produced ($1,350) 
• Based on pigs per sow per year ($2,000) 
• Based on pigs per sow per quarter above base rate ($2,800) 
• Based on pigs per sow per quarter above base rate ($1,600) 
• Bonus per pig weaned above 18.5 per sow per year 
• Bonus for higher hog production