Revised, August 2009

William Edwards
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 a recent survey by Iowa State University, farmers with full-time employees were asked to describe bonus plans that they used.  Fifty-five percent of the employees were paid some type of bonus. The value of the bonus payment ranged from $50 to $9,000, with the average value being $1,009. 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.  Some examples are:

• $3.50 per pig sold (total wage)
• $1 per pig sold ($12,000)
• Pay 50 cents per acre worked ($1,200)
• Two percent of calf sales

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, however.  For grain farms, for example, bonuses based on crop yields are difficult to implement fairly because yields depend on many factors beyond the employee’s control.  Some examples are:

• Pay $5 per pig sold over established base
• Pay $2 per pig weaned over 8.0 per litter average ($500)
• Bonus paid if death loss is less than 2 percent ($2,000)
• Pay 10 cents per bushel for bean yields over 30 bu/acre, 5 cents for corn yields over 100 bu/acre
• Pay 25 percent of quality payment from milk check

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.  Most cash bonuses amounted to 5 to 10 percent of the employee's total salary.

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 simply pay an extra month’s salary as a holiday bonus.  Some examples are:

• Bonus equal to 0.5 percent of pay for each year employed, minimum of 6 %, maximum of 12 %
• Bonus of one month’s salary for staying the full year ($1,250)
• Bonus equal to 10 to 20 percent of gross wages for completing the harvest season ($300-400)

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 expense areas such as machinery repairs also can be the basis for a bonus.  Long-time employees may be more willing and able 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.”  Some examples are:

• Quarterly bonus if profit goals met ($1,250 each time)
• Bonus equal to 10 percent of management return ($6,000)
• Bonus equal to 5 percent of IRS schedule F net farm profit ($1,500)

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.  Some examples are:

• 1,500 bushels of corn
• Employee receives 2 acres of crops to sell ($600)
• Ten calves and 150 bushels of soybeans

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.