Most companies offer employee bonuses in one form or another, but many employers don’t give much thought to their bonus allocation strategy. There are endless ways to “slice and dice” how bonuses are doled out, and the resulting confusion leads many managers to opt to stick with the bonus status quo. But just because something has always been done a certain way, doesn’t necessarily mean that it’s the most effective way! It’s worth looking at whether your bonus strategy is actually having the impact you want. When handled poorly, bonuses can actually be a demotivator – surprises, lack of transparency, and unspoken expectations can all lead to lack of engagement and lowered morale.
The good news? There are proven ways to increase chances that bonuses will have the impact you’re hoping for.
Tie bonuses in to your compensation philosophy. Bonuses are often allocated without much thought, based on how they’ve always been handled in the past. Before you decide how you want to allocate bonus dollars, it’s worth taking a good hard look at your compensation philosophy as a whole, and asking whether you’re rewarding the behaviours and results you want to reward. After all, your business goals evolve, which means your bonus strategy should keep pace with that evolution.
Expect employees to talk. You may request that employees keep bonus amounts confidential, but you can bet that there is still water cooler chit-chat going on. To avoid feelings of unfairness, negativity, or lowered morale, talk to employees about compensation. Ensure there is transparency around how bonus decisions happen, and how bonus dollars are divvied up. If multiple managers are responsible for making bonus decisions, make sure everyone is on the same page with what criteria should be used, and that this criteria is applied consistently.
Minimize surprises. Bonuses should never come as a shock, and they definitely shouldn’t be cause for disappointment. Keep employees in the loop, so that they understand when bonuses might happen, and what will determine individual amounts. Commit to regular check-ins and consistent in-the-moment feedback in addition to formal performance reviews. Regular feedback helps make sure employees are aware of how they’re doing (and adjust expectations accordingly) before the bonus cheques are cut.
If bonuses have happened in the past, but aren’t going to happen this year, let employees know in advance. From an employee perspective, there’s nothing worse than receiving a Christmas bonus ten years running only to find out on December 15th that the company has revamped their compensation strategy and Christmas is cancelled. If bonuses aren’t in the cards this year, get creative with motivating employees and consider other initiatives (Think Pro-D opportunities, flex days, cross-training, appreciation, or opportunities to work on interesting projects).
Bonus or entitlement? Bonuses are most effective when they reward employees for discretionary effort, but often if an employee has received the same bonus year after year at around the same time, they come to expect it. Instead of being linked to going above and beyond, the bonus is instead viewed as an entitlement. If that’s the case, they’re likely factoring it into their total comp calculations already, and it’s probably not driving much in terms of results.
To help employees understand how bonuses tie in to the company’s overall compensation strategy (and lessen the likelihood that bonuses are viewed as entitlements), define and convey a clear bonus allocation policy. If you don’t already address bonuses in your employee handbook, now’s the time to add some details! Employees should understand how company results factor in, which individual activities and results are rewarded, and what they can do to be eligible for bonuses.
Get creative with your bonus schedule. Ditch the yearly bonus in favour of a more timely approach. Consider monthly or quarterly bonuses, or tie in bonus payments with important milestones and accomplishments throughout the year. More timely payouts can help directly link discretionary effort to financial rewards.
Your Engaged HR Assignment:
Clarifying your approach to bonus allocation starts with articulating your compensation philosophy. If you haven’t already, set aside some time in key stakeholders’ calendars to define your approach to total rewards!
If you’re not sure where to start when it comes to bonus allocation strategy, we are more than happy to share our two cents!