Don’t let bonuses kill the holiday season

It’s bonus season, and while many places have paid out year-end bonuses by now, it’s still an interesting topic to explore, and to get it right if you haven’t yet. Too often, employers mishandle or poorly execute bonus season. This results in disgruntled employees, reduced productivity, and like I often see, employee departures, especially in this market where skilled workers can basically go knock on any door and get a new position.

While it’s called a “bonus,” there’s a funny bit of entitlement psychology at play. People tend to feel entitled to a bigger bonus than the one they received last year. Also, it’s very important to see how your bonuses compare across your people (assume everyone will discuss their bonuses with each other) – an employee who receives a smaller bonus than their peer with the same title will feel like they are not appreciated enough, like opportunities of upward mobility will go towards others, like their company is not really the right long-term match for them simply because others are liked better. And of course, a smaller bonus than last year, a very late bonus, or even no bonus at all (when a company isn’t doing well) can send someone immediately out the door.

A few tips to keep employees happy, lessen the blow and prevent employee discontent:

1.Pay up

If you can afford it, pay everyone a bonus larger than last year. Keep your people happy. They are the most important part of your company, don’t forget

2.Pay up on time!

I don’t understand why so many firms hold bonuses for a few extra months, telling their employees they need the cash flow to make additional investments… People oftentimes use bonus payments for the holiday season, don’t withhold it from them. Companies come across as careless, cheap. Not everyone has the same mentality as the people running the company at the top-level, remember employers will put themselves before the company— care about them like you care about yourself, put them first

3.Keep bonuses the same across positions of the same title

Reward the highest performers with upward mobility instead, if possible. Put together a concrete plan to make it to the next position, and talk about it with the top employee(s). If you are going to offer a larger bonus to someone, make sure it goes to the peer with the most seniority or the one who truly went above and beyond and evidently deserves it (it needs to be very obvious to employees that these high performers are the ones who deserve the larger bonus—but make sure you know the peers with the smaller bonus will still feel less important nonetheless, it’s very important you understand that)

4.Don’t start paying out bonus if you can’t afford it, or start small

It’s unwise to start paying out an annual bonus unless you’re confident cash flows will permit the same bonus payment in the future. If you want to play it safe, start with a small bonus program and increase over time. Offering a bonus and taking it away the next year is not a quality many will appreciate of a long-term employer

5.Give plenty of warning if bonuses will be smaller or canceled

Don’t show up the week before bonus season and say that it’s cancelled. Give employees plenty of notice and explain the reason the bonus won’t be what/when they expect it, and that it will not be due to their performance, but rather due to financial matters with the firm

6.Give your employees something in exchange for the loss of the bonus.

In order to reduce the impact of the loss of a bonus, give your employees something in exchange for that loss. It’s important to be sensitive here. Don’t hand out a Christmas card in lieu of a big cheque and expect any appreciation. That gesture will come across as crass. Instead, try to think of meaningful benefits you could extend to reasonably compensate for their loss (and they will see it as a “loss”). Additional paid time off or new workplace privileges (free gym access, for example) could, in the right circumstances, prevent employees from feeling slighted by bonus structure changes.

Don’t exchange a bonus for a promise of something better next year. For example, some employers will justify their decision not to pay bonuses by referring to tight budgetary constraints, but then say that if things are looking up next year, employees will get double the usual bonus. Why are they going to give you their best performance again? If you didn’t reward them this year, why should they believe things will be different next year? Second, people react differently, and more strongly, to the loss of things they believe they’re entitled to than to gaining something new, a phenomenon called loss aversion. In other words, an employee will weigh more heavily the loss of this year’s bonus than a doubling of next year’s bonus. Finally, ensure that if you cut your employees’ bonuses, you’re not taking one yourself. It’s a horrible look for a business owner to take benefits that she is denying to her employees. If they suffer, you have to suffer too.

Remember that the money you “save” by failing to pay (the right) bonus can very often be illusory. Real reductions in employee productivity and morale can create significant losses, especially in the period immediately after bonus season. You should give serious thought to whether you can find efficiencies elsewhere.

Wrapping Up

I hope these tips and comments provide value to you in operating properly through bonus season. To recap:

· Pay employees the right bonus, and be wary of bonuses across peers and making sure you don’t make people feel unappreciated

· Don’t take bonus arrangements lightly. Once you’ve started paying them, you’ll be expected to keep paying them, and paying properly. Think of them like dividends to shareholders.

· If circumstances absolutely require you to reduce or eliminate a discretionary payment to employees, do so with plenty of warning and attempt to compensate employees for their loss.

· Don’t provide empty promises in exchange for the loss of a bonus or think that you can make up for the loss by doing better next year.

· Don’t take a bonus yourself if you’re cutting them for your employees.

· Slashing bonuses should be a last resort. Look elsewhere for efficiencies first, before turning to what are effectively salary reductions.