How To Create Effective Year-End Bonuses

When tied to accomplishments, year-end bonuses can act as effective motivators. Take care in the program’s design to keep workers happy.
year-end bonus

Employees this year appear set to receive a nice holiday gift from their employers.

Roughly 75 percent of companies said they plan to give employees a year-end bonus this year, according to a report from staffing firm Accounting Principals, up from 67 percent of companies that said they planned to award bonuses last year. Employees’ bonuses are also expected to be larger than last year’s. The average expected bonus for 2016 is $1,081, according to the Accounting Principals survey, versus $858 last year.

Increasing bonus volume and amount could be a positive sign that companies are feeling more profitable, but what exactly is the best way to design year-end bonus packages? We spoke with two experts to weigh in.

Cash Money

Annual checks remain the prominent way companies dole out bonuses, though questions remain about other routes to take, such as sabbaticals and extra paid time off, said Sandra McLellan, North America rewards practice leader at Willis Towers Watson, a research and advisory firm. Other models include actual gifts or other items symbolic of being recognized, added William Schiemann, CEO of Metrus Group Inc., a business research and management consultancy in Somerville, New Jersey. Sales staffs tend to offer all-expense-paid trips for top performers, and company parties act as a celebration for the whole company.

Whether these bonuses or perks serve everyone or only top performers is a challenging decision to make and communicate.

Companies tend to try to tie performance and pay, McLellan said, but by the time that bonus reaches the employee, communication breaks down. There should be a line of communication where workers know how they contribute and how the company is doing overall. Then comes that performance conversation and a bonus check. Ideally, employees go home with their bonus check (or lack thereof) and feel supported, know what they needed to do for the year and understand why the bonus was what it was, McLellan said.

According to Willis Towers Watson’s 2016 Global Talent Management and Rewards, and Global Workforce studies, 44 percent of workers in the U.S. indicated that there is a clear link between their performance and pay. Whether there’s more of a link than employees noted might not matter. “I do think that perception is reality,” McLellan said. “If they don’t see it, it doesn’t happen.”

Wait Until January?

The end of the year is difficult for most to juggle, with workers wrapping up tasks and preparing for time off with family. Having performance conversations on top of it all is hard to achieve. Because allocating the necessary time is particularly difficult at the end of the year, Schiemann suggested companies do a collective bonus or holiday party, then wait to do raises and performance-based bonuses in January or February. When having these conversations in December, managers feel compressed and resort to doing what’s been done before, rather than taking special care and truly paying attention based on performance, Schiemann said.

At large companies, Schiemann said CEOs tend to set the tone for their company’s bonus strategy, but the workers identify more with their business unit. Therefore, he suggested that managers at lower levels handle the bonus strategy, while following company policies as a framework.

Some companies employ unconventional bonus strategies. Outdoor clothing retailer Patagonia uses peer feedback to gather insights about employee performance, said Dean Carter, vice president of human resources, finance and legal at the Ventura, California-based firm. The traditional model of a manager judging employee performance and doling out bonuses can leave some feeling left out of the rewards, especially if they have a bad manager or one that can’t devote the time for a deep performance conversation. Now, the manager acts as a connector between performance feedback and the employee, rather than being in full control, Carter said. And if an employee performed extremely well, they receive an extra bonus.

Do year-end bonuses work?

Various forms of bonuses work for different roles. For example, a Harvard Business School study, Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans, found that a bonus-based compensation plan does work for sales staffs, and “overachievement commissions help sustain the high productivity of the best performers even after attaining quotas.” Another HBS study, Prosocial Bonuses Increase Employee Satisfaction and Team Performance, found that donations to charity led to more satisfied workers at a bank in Australia. Overall, some form of recognition for one’s hard work is sure to be the motivator a bonus is meant to encourage.

“If you’re going to keep bonuses motivating and healthy, they need to be different, they need to represent some successes, and they need to be tied in some way visibly to accomplishments,” Metrus Group’s Schiemann said. Standard bonuses for all are not special and become expected. If taken away, they are likely to become demotivating. If moving away from a standard reward, complement it with something else and communicate the reason for doing so. Schiemann encouraged business leaders to think about what they hope to accomplish with the bonus.

Context is also important. If a company saw a difficult year with layoffs, and they end with a large holiday party or exorbitant bonuses, it sends a mixed message to employees. And if the company had a bad year financially and gives the same amount as the year before, it doesn’t reflect the reality of the group’s accomplishments.

Lauren Dixon is an associate editor at Talent Economy.

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