Holiday Bonuses—why or why not?
The subject of holiday bonuses always seems to generate much interest, generally right about this time of year.
In past years and decades, holiday bonuses were quite common. It was not unusual for many, if not most, employees to get a modest-sized extra payroll check at the end of the year. I once worked for a large steel maker in the early 1970’s and each year I would get an extra check for about two week’s pay. No one ever told me why I received the bonus or how the amount was determined. It just appeared—a bit like Santa in the night. I am sure we were not the only company with such practices at that time.
These types of holiday cash bonuses have become much less common in recent years as employers respond to tightening financial conditions and also confusion over the role and objectives of the holiday bonus.
Should your company adopt or continue such bonus practices? To help with that decision, let me answer three common questions we hear most often asked about holiday bonuses.
1. Is it compensation or an employee benefit? If the company grants the bonus as my former employer did, it is hard to argue it is anything but an employee benefit. Now, both pay and benefits are valuable to employees, but they are very different animals. If the bonus is treated and viewed as a benefit, it can become an entitlement that is expected (as in the past), must be faithfully paid (good company results or bad) and can never be reduced without major angst.
However, if the bonus is treated and perceived as extra compensation (based upon something—like company results) there is no entitlement created. In my book, a bonus must be seen as extra compensation earned for a reason. For example: “If the company hits its profit goal this year, I get a $500 year-end bonus. If they do better or worse, I get more or less. If things are really lousy, I will get nothing.”
2. What purpose can (should) a holiday bonus serve? A holiday bonus can give an employer the opportunity to pay a little extra compensation to a broad group of employees in recognition for their contribution to success. Most of the employees who participate will never see, nor be eligible for, annual performance-based incentives or bonuses—other than in the form of a year-end bonus. Also, market data tell us that even lower-level employees will generally earn some amount of bonus compensation annually. A holiday bonus program can make perfect sense, and may even (silently) address the pay expectations of the 80% of your employees who are never considered “bonus eligible.”
3. If there is a bonus program, should everybody in the company get one? If you give it to one, you should give it to all. It is often best to offer everyone a year-end bonus of, say, between 0-3 week’s pay, based on company financial results. But, do not mistake a holiday bonus as a substitute for performance-based incentives for executives, managers or professionals. Normal incentives for executives, manager or professionals should then be layered atop the bonus.
We believe that a holiday bonus can be used as an effective compensation tool, if you follow a few basic rules of application:
- Tie the bonus to something collectively achieved—i.e.: company success (“Why am I getting this?”);
- Communicate the general relationship of the bonus to current or future success (“If the company does well I benefit, but I may not get this every year.”);
- Apply it fairly across all employees and groups (“The VPs and I are all on the same deal.”)
But, do not start or continue such a bonus program with good intentions and then let it devolve to an employee benefit. Once started (as you know), benefits historically can be very difficult to terminate.
And, if you cannot decide what to do about a holiday bonus and just want to give everyone a turkey for the holidays, read our next article…