December may not always mean snow, but it's becoming a more reliable harbinger of end-of-year bonuses.
Last year, more than three-quarters of employers planned to pay employees year-end bonuses averaging $1,081 apiece, according to a 2016 Accounting Principals survey of 500 U.S. hiring and HR managers.
Those figures were up from $858 in 2015, according to the Jacksonville, Florida-based staffing firm. And this year indications are that end-of-year bonuses will continue to expand.
"That number is up to about 80 percent of companies intending to give year-end bonuses," says Jeramy Kaiman, an Accounting Principals vice president, referring to industry estimates. "Of the 20 percent of companies that aren't giving year-end bonuses, almost half are giving some kind of perk such as a gift card."
End-of-year bonuses may not be right for all businesses or all purposes, but human resources experts expect current conditions to encourage the practice to become more widespread.
"It's two things," Kaiman says. "One is that companies are performing well and have the ability. The other is that it's necessary for retention."
Reasons for End-of-Year Bonuses
Employers dole out end-of-year bonuses for a variety of reasons. Some want to reward individual employees, teams or the whole organization for achieving designated objectives. Others seek to reduce turnover, while others simply want to share the wealth of a profitable year.
Businesses that want to join the year-end bonus trend, or refine their bonus-giving technique, may want to start with determining the purpose of the bonus.
"The intent is everything," Kaiman says.
If a bonus is supposed to motivate individuals, teams or the organization to reach performance targets, consider setting targets based on relevant, measurable metrics at the beginning of the year. Deciding whether or not employee, teams or the entire workforce gets the bonus can depend on the outcome of performance reviews.
"You don't do bonuses without reviews, period," says Jay Starkman, CEO of Engage PEO, a Hollywood, Florida-based human resources outsourcing provider to small and mid-sized organizations. "The performance review is the key element that links the bonus to performance."
But that's if a bonus is only about meeting performance objectives. Many employers pay end-of-year bonuses to share the wealth of a profitable year, to thank employees for their contributions or for a variety of reasons.
"The bonus works at an individual level, it can work at a team level and it can often work at an organizational level," says Kevin Mulcahy, co-author of The Future Workplace Experience and partner at Boston human resources advisor Future Workplace. "A good bonus plan has some elements of those three things."
Bonuses Beyond the End of the Year
One frequently cited reason for paying end-of-year bonuses is to encourage retention. The end of the year may be a good time to offer bonuses as some employers may ramp up efforts to recruit employees from other employers about then.
For employers with retention concerns, it may be even more effective to delay paying employee bonuses until the first-quarter hiring season ends.
"They earn the bonus at the end of the year based on defined goals or as a thank you," says Kaiman. "But maybe the bonus is paid in March or June." Employers sometimes spread bonus payouts further, distributing half at the end of the first quarter and half at the end of the second quarter.
Tax savings can be another reason to pay annual bonuses after the first quarter begins. However, Mulcahy says delaying payments in this fashion may cause employees to disconnect their performance with reward.
"That mentality of optimizing timing of payout to preserve tax incentives has nothing to do with the experience of the employee," he says. "It's pennywise, employee foolish."
However, Mulcahy does endorse paying bonuses quarterly throughout the year. Quarterly rewards can provide rapid, tangible feedback on performance achievements, he says.
"Most employees prefer a more predictable and regular payout, quarter by quarter, rather than waiting for the big payout 14 months after a financial year has begun," he says.
Avoiding Potential Bonus Blowback
No matter how well-intentioned a bonus plan is, employers can go wrong with bonuses. Best practices call for bonus programs to be clearly explained and rigorously followed so that employees can see why they did or did not receive a bonus.
"When there's lack of transparency around bonuses, it can create frustration and turnover," Kaiman says.
It's also incumbent upon employers not to overspend on bonus programs, or to offer bonuses when employees really want something else. Amy Power, CEO of Dallas integrated marketing firm The Power Group, says she has paid end-of-year bonuses in the past. However, these days she says employees place more value on perks such as flexible scheduling and employer-matched retirement plan contributions.
"If the company has a stellar year, would I consider giving bonuses? Sure," Power says. "But for the owner of a small company it comes down to how things are netting out at the end of the year and what you want to do for your staff."
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