Should You Pay Employee Bonuses?

Design and communication are critical to making employee bonus plans work for your business.

Should You Pay Employee Bonuses?

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The holidays are coming. Can year-end bonuses be far behind?

Some businesses choose to give their employees something extra either at the end of the year or just after the new year. Whether that’s a good idea depends on what you’re trying to accomplish.

Some bonuses are really nothing more than an extra check the employer hands out annually. It’s probably not very big, and it’s not tied to the performance of the business. If anything, it might be tied to how long the employee has worked there – going up in increments for, say, every five years a person has been at the company.

That kind of bonus might be a nice little perk – emphasis on the little. It builds goodwill in a season of gift giving (maybe) but not much else.

The other kind of bonus is supposed to be tied in some way to company performance. But if programs like that aren’t handled properly they won’t be effective, says Bruce Elliott, manager of compensation and benefits at the Society for Human Resource Management in Alexandria, Va.


Halo Effect

For one thing, bonuses don’t change the minds of employees unsatisfied with their regular pay. “We find the ‘halo effect’ on these year-end bonuses probably isn’t long,” says Elliott. “If you already feel like you’re underpaid, the bonus isn’t going to help that much.”

Another big problem: The incentive is often too disconnected in time from the behaviors it’s supposed to reward. “If an organization sets up a plan, communicates the metrics, and says, ‘OK, we’re done, we’ll wait till the end of the year’ [to pay out], the effectiveness erodes,” he says.

It’s also a bad idea for small-business owners to simply add up their year-end profits and then carve off some fixed amount or percentage as the employees’ bonus.

“They run the risk of turning their ‘incentive systems’ into entitlements,” Elliott says. And when business hits the doldrums and you don’t pay a bonus one year, watch out. “If you haven’t done a good job in conveying what your plan metrics are, then you have a bad year, your employees get very angry.”


Feedback Loop

Smart bonus plans give participants ongoing information about how well they’re achieving the goals that the bonus is supposed to reward. Without that kind of “feedback loop,” he says, “it may not end up accomplishing what the organization intends to accomplish.”

Some approaches seem to fall in and out of fashion. One example is gainsharing plans, which reward workers for improving productivity. Popular in the 1980s, gainsharing lost support in the 1990s but now is coming back in some forms, Elliott says.

But the key to making any such program work effectively is to target specific, measurable goals and communicate clearly and regularly about what it takes to reach them.

“It’s not just a matter of saying, ‘Here’s my incentive system,’ ” Elliott says. “If you’re communicating clearly to the employees as to what the metrics are to that plan and what the progress is against those metrics, you’re going to get a lot more bang for the buck.”

That way, “at the end of the year the employee knows exactly what they’re going to make and how they made that money.”


How It Works

For instance, you could say that for every 5 percent increase in profitability you’ll reward each employee $1,000. You also need to clearly explain what factors and forces under the employees’ control will help accomplish that.

Then throughout the year you report regularly how well the business is progressing toward that goal, and reinforce the link between that progress and the incentive reward. Quarterly reports are typical and can help employees encourage each other to keep on the ball to hit the target for that period.

You also need to pick goals that are legitimately within the control of employees. To pick an absurd example: If your work requires good weather, you’re not going to reward people for productivity gains that can be tied only to the fact that you’ve had a month of warm, sunny days.


Cash Is King

Some companies offer smaller-bore, focused incentive and recognition rewards – merchant gift cards, a company-bought family dinner to reward high performers and the like. But when it comes to formal reward and recognition systems, cash is pretty much king, Elliott says.

And he views some incentive programs – such as attendance awards and no-lost-time safety rewards – with skepticism.

With perfect attendance awards, “I question the efficacy because the money just isn’t that big,” he says. “Unless you’ve got a big problem with turnover and the cost to replace people is really high, and if you don’t have an attendance problem to begin with, why would you put something like that in place?”

Safety incentives have another potential downside – leading some employees to cover up accidents so that they get the quarterly reward for not losing time. One way to counteract that, he suggests, might be to empower an employee to function as a sort of in-house safety inspector, with a bounty for every hazardous situation he or she uncovers.

“When you look at incentives what you want to look at are the kind of behaviors you want to drive,” Elliott says.


Keeping It Memorable

Still, he says, whatever form it takes, “a bonus is always found money” – and once it’s spent, it’s gone and forgotten.

Considered that way, he finds no downside to simply paying a solid market, or slightly above-market, wage along with reasonable benefits.

But don’t just leave it at that. Along the way, fully communicate the value of all forms of compensation employees receive, Elliott says.

Larger and mid-sized companies increasingly provide their employees a “total reward statement” that lays out not just the individual’s wages or salary but also the dollar value of the company-paid portion of their benefits. And if there is a bonus program, that’s included too.

Small shops can follow that example. And don’t just rely on a dense document that looks and reads like an insurance policy. It needs to be simple and clear to follow. And it’s also a good idea to walk everyone through the statement to ensure they really understand it.

Then with every paycheck – weekly, biweekly or monthly – employees will be reminded exactly what they’re getting.

“They’ll be much more engaged,” Elliott says. “That goes a longer way than a bonus.”


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