Article : What is Wrong With Annual Employee Bonuses?

In recent years, most companies have recognized the benefit of financially rewarding their employees with more than the standard salary plus benefits compensation package. One of the most common forms of additional compensation is an annual cash bonus. If properly implemented, the benefits of a bonus system are as follows:

  • An incentive is created for all employees that are eligible for a bonus, to put in the extra effort needed to achieve or exceed the corporation's business plan.
  • Employees are given an extra incentive to achieve their own personal business goals, which have been determined by their supervisor.
  • Top performers are retained by and attracted to the company because they are compensated for their strong performance.
  • The corporation increases its financial flexibility by being able to increase or reduce the bonus pool in response to the company's financial performance.

At many companies, the annual bonus payouts are a seven-figure budget item that constitutes a substantial portion of total compensation costs. Given the importance of these programs, it is imperative that corporations work towards getting the most "bang for the buck". While most would agree that bonus programs have a positive effect on business productivity, the typical cycle of an annual payout is not ideal.

One problem with an annual cycle is that by the time the bonus is paid, the employee and the employer have lost sight of much of what was accomplished during the past year. The result is that the bonus is typically based upon the performance of the employee for the latter part of the year, and not the entire evaluation period. Often, there will be substantial achievements that are not recognized simply because they were completed earlier in the year. These shortcomings reduce the motivational impact of the bonus for the earlier part of the year. This myopic standard for bonus criteria is often exacerbated by the fact that it is common for an employee to have different supervisors during the course of one year.

Annual bonuses do not fit well with the rapidly changing environment in which we all work. This changing environment necessitates the need for business and related individual goals and priorities to change significantly during the course of a typical year. The annual bonus does a poor job of recognizing the importance of priorities earlier in the year. The simple fact that a business priority was prevalent early in the year should not make it less important when it comes to paying bonuses.

When bonuses are a substantial portion of the total compensation package, organizations also run the risk that they will lose some of their best employees right after bonuses are paid. This is clearly disruptive to any business. If bonuses are paid out on a quarterly or semi-annual basis, this risk is significantly reduced.

With all this talk of money, we must not lose sight of the fact that the actual delivery of the bonus message from a manager to an employee is often as important as the check itself. In fact, when the check is delivered it is an ideal opportunity to discuss historical performance, and to jointly agree upon goals for the future. In my experience, both parties are highly focused on these issues at this time because of the immediate financial relevancy. A bonus payout program that is administered more often than once a year will foster substantially more effective communication between managers and their employees.


© Copyright David W. Kellogg 2000. All rights reserved.

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