by Roy Saunderson | June 20, 2017
There are two main billing models within the rewards and recognition industry around providing clients with reward points or vouchers. These models are often referred to as the Issuance Model (or breakage model) and the Redemption Model. There are pros and cons to each billing model and these Top 10 Insights on Issuance and Redemption Billing should provide invaluable guidance.

1. Understanding the Issuance Model. The Issuance Model, sometimes referred to as the Breakage Model, is when the client company prepays to the recognition and reward vendor for points and/or award vouchers. Vendors then debit the prepaid amount against redemptions made by recipient employees on its balance sheet.

2. What is breakage rate? Breakage rate is the total number of points or award vouchers not redeemed at the end of a pre-defined period of time divided by the total number of points issued, including any expired points.

3. Understanding the redemption model. The Redemption Model of billing is where the vendor invoices the client company on a predetermined schedule after recipient employees redeem their points or award vouchers.

4. What is redemption rate? The redemption rate is the total number of points or award vouchers redeemed by recipient employees divided by the total number of points or awards issued. The higher the redemption rate indicates recipients are highly engaged with the employer's reward and recognition program.

5. Contractual obligations. The key to ensuring funds of an employer client are used exclusively for their own reward and recognition program is to include contractual and enforceable, protective obligations for the term of the contractual relationship. Accounts can then be audited and reconciled on a predetermined time schedule.

6. Tax compliance. Make sure your recognition and reward program is tax compliant with your legal counsel. Most companies gross up and pay the taxable benefit on the points or award vouchers they distribute. They need to decide what they will do and, with all such matters, be sure to obtain proper legal advice.

7. Employee termination. When an employee leaves a company with unredeemed award vouchers or points the employer must have a plan of action to address unused points or vouchers. Under the Issuance Model the employer typically loses prepaid funds unless contractual arrangements have been made to split the breakage. With the Redemption Model the employer owes nothing, given funds are advanced only after employee recipients redeem their award vouchers or points.

8. Exit strategy. When an employer and vendor end a contractual relationship, the contract should explain what happens to unredeemed points or award vouchers. With the Issuance Model the former vendor should be obligated to transfer outstanding, prepaid point and voucher balances to the new vendor as contractually negotiated and based upon redemption history. With the Redemption Model, the former vendor should be required to transfer redemption history to the new vendor, preferably on a gratis basis.

9. Protection over funds. With the Redemption Model the employer has full control over funds because they pay invoices issued after points or award vouchers are redeemed. With the Issuance Model there is a loss of control for the employer because they prepay for points and awards. However, contractual obligations should restrict use of funds and give methods for accountability.

10. Transparent reporting. Vendors should be contractually obligated to provide employer clients with their breakage rate and how employee recipients are redeeming their points or vouchers. Regular statements or digital reminders to employees marketing how to redeem points or award vouchers should help all program participants.

Incentive columnist Roy Saunderson is the author of Giving the Real Recognition Way. The Vistance Institute chief learning officer at Rideau Inc., Saunderson provides consulting, learning, and thought leadership services focused on helping leaders and managers give real recognition the right way. He can be reached at [email protected] and followed on Twitter (@RoySaunderson) and at his blog.