The year-end bonus is a staple at many companies. Unfortunately, what’s meant to be a positive thing often turns into a negative experience.
Year-end bonuses are typically meant to reward people for their efforts and provide motivation going forward. Instead, unmet expectations and an attitude of entitlement often result in disappointment, hurt feelings and even employee turnover—not exactly the intended outcomes.
The problem is the typical year-end bonus fails to adhere to tried-and-true best practices for incentive compensation. In fact, the problem starts when the year-end bonus is not viewed as incentive compensation but as a generous gift from a caring owner or management team. Bonuses are incentive compensation. Period.
All incentive compensation should be tied to results and performance, not random acts of kindness. If the company does well, bonuses increase and vice versa. If individual performance is good, bonus amounts are higher and vice versa. There needs to be a link or bonuses will appear random, or even worse, distributed with favoritism or a “what did you do for me lately?” mentality.
When companies correlate year-end bonuses with results and performance, there should be no surprises, since results and performance should be well-known throughout the year. Even if it’s discussed only quarterly with a high-level update, employees deserve to know how the company is doing overall and how they’re doing individually. Again, there should be no surprises.
Another consideration is the timing of year-end bonuses. If distributed just prior to Christmas, as many bonuses are, they’re even more likely to be expected. I highly recommend moving the year-end bonus to another time of year. Just because the calendar year ends Dec. 31 doesn’t mean bonuses need to be handed out during this season. There’s some wisdom in waiting until after the books are closed and taxes are completed to get a more accurate read on bonus calculations.
Who gets a bonus?
Who should be involved in the year-end bonus program? Many companies choose to involve management only, while others include all full-time, year-round staff. Others include all personnel. Tied to this decision is the question of how much is too little before it’s demotivating or even insulting. For example, a year-end bonus of $500 may be motivational to a lower-level person in the company, but $28.50 may be more of an insult. It’s important to run through some scenarios to see how the math plays out when attempting to make this decision about who to include and who not to include.
The amount and allocation of the year-end bonus pool are additional considerations. Some level of profitability should determine the bonus pool with approval by the senior management team. If the company has met or exceeded its goals, the bonus pool may be filled according to a predetermined formula. However, if the company has not met its goals, bonuses should be a moot point.
Regarding allocation, managers deserve a bigger share of the pool, on a pro-rata basis, than those they manage. An easy way to determine allocations is to use an adjusted weighted-average method. Using this method, allocations are fair and easily justified, if necessary. Variances for individual performance may be made quickly and accurately.
Finally, year-end bonuses are much more powerful if delivered in front of the recipient’s peers. The first management bonus I ever received was given to me at a large managers’ meeting in front of my fellow managers. While I don’t recall the amount of the bonus, I will never forget the sense of pride and accomplishment I felt walking up to collect the sealed envelope and shake the hand of senior managers who were present. Talk about a powerful impact!
As the year comes to a close, now is a good time to reconsider and make improvements to your year-end bonus program. Best wishes for a wonderful Christmas season and a successful 2016.
