Are Year-End Bonuses a Bad Idea?
Bonuses come in all sorts of shapes and sizes. Generous employers who have had a good year or are benefiting from some tax cuts, may feel that holiday spirit and give employees a little something extra in their stockings this year. But be cautious in your generosity as not all bonuses are created equal. Rather than just jumping into that giving spirit, it may be better to develop a longer term bonus strategy to motivate employees to meet company goals and performance metrics.
3 Factors to Consider Before Handing Out Bonuses
Discretionary bonuses are typically not very effective. If year-end bonuses are paid, they will create the greatest ROI if they are pre-defined, in writing, and clearly communicated. Ad hoc bonuses are usually not effective at focusing employees on desired future behaviors to help the organization meet its’ mission and goals.
Base pay needs to be competitive. In the current war for talent (see my blog 7 Ways to Retain Employees in a Tight Labor Market), annual cash bonuses cannot be seen as a replacement for base pay increases which keep strong performers paid at or above market levels for their talent. Super stars need to be compensated as super stars, and those who are not top performers need to be paid based upon their contribution to organization success. Base pay levels way above market pay for average or low-performers creates an entitlement mentality which often has negative long-term effects, and creates a huge drag on organization profitability.
Money is not the only answer. High levels of employee engagement, employee retention and job performance happen when leadership continually does the appropriate heavy lifting needed to keep people focused on the mission, vision, and annual goals of the company. While a well-designed annual cash bonus plan can incent behaviors and results needed to get the company where it needs to go year over year, there is more to the equation. Critical to success is having leadership that:
is emotionally intelligent,
recognizes employee’s contributions,
mentors employees for future personal and professional growth,
continually lives and communicates an organization’s sense of purpose,
creates a sense of community, and
puts an organization way ahead of its competition because it has a winning culture.
Still Struggling on Whether a Bonus Plan Is a Good or Bad Idea?
Conover Consulting, Inc. has worked with hundreds of organization leaders over more than two decades in setting competitive, appropriate pay structures, assessing merit increases and creating effective bonus strategies. A well-defined bonus plan starts with a careful compensation analysis, so contact me and I will be happy to talk through ideas. Also, read all of my blogs on Compensation to get on track with retaining and rewarding your employees.