To Bonus or Not To Bonus: That is the Question
“Look, my philosophy in life is expect nothing and everything else is a bonus.” – Hugh Jackman
Those are some pretty zen words from Wolverine. The end of the year is fast-approaching for you and your employees. For many, it’s time to put up holiday decorations, make travel plans, or budget for 2022. At DyNexus Recruiting, we’re working hard on our 2022 Salary Guide. You can find the 2021 version here. For others, it’s time to play the game of “how much can I afford to spend because I don’t know what my bonus will be?”
Bonuses come in various forms. Some companies reward workers for individual contributions or as a commission of sales. The more you do, the more you get. Others reward team effort. If your team performs well, everyone gets a bonus. Some are based on how well the company does overall. And then there’s the “discretionary” bonus that you cannot clearly define in dollar amounts or in times disseminated through the year. Ideally, bonuses benefit everyone involved: your customers, your workers, and the bosses. They can be a useful motivator. But is there a potential downside to bonuses as well? We’ll explore that as we ask To Bonus or Not To Bonus: That is the Question.
What’s A Bonus?
Webster defines a bonus as “something in addition to what is expected or strictly due”. There is a story many of you know about a family man named Clark Griswold. He lived with his wife and two children in Chicago. Clark had been an additive designer for a cereal company for many years and received praise for a new cereal varnish. Every year, he counted on an annual holiday bonus as part of his pay. In anticipation of his bonus, he put a large down payment on a pool for his family. What he didn’t realize is that his boss decided to do away with the “discretionary” bonus. Instead, he rewarded his employees with a membership to a “jelly of the month” club.
An attorney analyzing this case pointed out that “an employee’s entitlement to a bonus is governed by the terms of the employer’s bonus plan.” The lawyer goes on to confirm that “a bonus payable at the discretion of the employer is subject to forfeiture if the bonus plan so provides”. This means that unless your bonus is clearly defined in dollars or percentages and timetables, they are not guaranteed. Fortunately for Clark, his cousin stepped in and was able to help negotiate a fair settlement.
Not To Bonus
First, we’ll talk about the possible negatives for bonuses. One potential downside is that your employee can come to expect a certain amount of money based on one or a series of bonuses. If your business has great profits one year and doles out substantial bonuses, staff can become disheartened or even resentful if the bonus is smaller or even non-existent the next year.
Bonuses can also create an unhealthy competitive atmosphere. While some competition (depending on the job) can be a great motivator, collaboration usually produces better results for your company as a whole. As pointed out in an article by Chron, employees might be tempted to take on more work than they can handle. This can also lead to a substandard product or service for your customer.
For employees whose wages depend heavily on bonuses, they can sometimes be surprised at tax season. As pointed out by awardstaffing.com, “The IRS considers a bonus to be supplemental income and therefore, it’s taxed at a flat rate, which is usually higher than the rate on employee wages.”
The same article also reiterates that the temptation to cut corners to increase numbers rather than deliver a solid product or service might be too great for some to resist when bonuses are attached.
Bonuses can also be frustrating when they are not as large as one hoped or expected. This is often the case with discretionary bonuses as opposed to measurable outcome bonuses. It can be stressful not knowing when or even if you’ll receive a bonus, how much it will be, or even what you can do to make it bigger.
Of course, bonuses also have strong potential upsides for your customers, your workers, and you. Afterall, the core of their intent is to benefit all three parties. As pointed out in an article by Quickbooks talking about the benefits of employee bonuses, they can increase motivation, make a company more attractive to job seekers, build team collaboration, and create friendly competition.
A year ago, an article was posted by Robert Half Talent Solutions about the benefits of year-end bonuses. In addition to the benefits pointed out by Quickbooks (bolstering retention, team productivity, attracting new talent), Robert Half found that 54% of employees were expecting year-end bonuses. This bonus can go a long way to show appreciation on an individual, departmental, or company wide level. It can help employees feel like their work contributions made a difference. The article also pointed out the importance of communicating “why” you are giving out the bonus, being mindful of how you disseminate the news, and having a back-up plan if bonuses aren’t an option. Remember, a Jelly of the Month membership is not a valid plan B.
Something that shouldn’t be overlooked in non-monetary recognition. As noted in a recent article on compensationcafe.com, there is a lot of power in a simple “thank you”. Whether it’s peer to peer, supervisor to subordinate, or coming from the executive level, saying “thank you” and recognizing one’s contributions goes a long way with satisfaction and loyalty. Other popular non-monetary forms of recognition are Employee of the Month or Annual Awards Ceremonies. While these should be fun, make sure they are also meaningful. However, at the end of the day, your “thank you” doesn’t pay the bills.
As a final thought, if you do decide to incorporate bonuses as part of your pay structure, there are a few things to keep in mind. First of all, is this bonus something employees can expect on a regular basis? You should be clear on what the bonus is based on and when it is doled out. Whether it’s individual contributions or overall company success, you should lay out as clearly as possible what the mitigating factors are. Your employees need to know what is expected of them, so they know what to expect in a bonus, and when.
Another thing to consider is how achievable your expectations are. Are your employees regularly hitting bonuses? Are they having to work overtime and weekends to hit those bonuses? Is the max bonus $10,000, but the most anyone has ever received is $4,000? If your goals are not realistically achievable, the bonus can quickly turn from a potential motivator to a demoralizer. Not only will the effort to achieve the bonus decrease, your employee morale will decline and you might actually lose employees to another company with a better pay structure.
Finally, is it reliable? As mentioned before, 54% of employees were expecting year-end bonuses. And most of them are probably expecting a bonus at least equal to what they previously received. What if bonuses at your company are discretionary or company performance based? What if sales are down resulting in smaller or no bonuses? The most important thing you can do is be transparent with your employees. If this is something they’re expecting and it’s not coming, failure to address this as soon as possible can also result in negativity and resentment.
Again, every company does it differently. Some companies offer no bonuses. Some do. And the bonuses come in all shapes and sizes. There are arguments for and against bonuses. So, To Bonus or Not To Bonus: That is the Question. The answer? Well, that’s up to you. Just make sure the bonuses achieve your goal of benefitting the customer, the employee, and the company overall.