If you’re like most companies, you probably already give annual bonuses to thank and reward people for their work throughout the year. Except, there’s a problem: A yearly bonus isn’t always the best way to do that.
For starters, it’s worth asking: Is a bonus meant to recognize people for past achievements or to spur future ones?
Yes and yes — because rewarding people for past accomplishments is often a good way to motivate future achievements. And yet, annual incentives do not actually boost performance, say about half of HR professionals. Employees say the same, especially millennials, 41% of whom prefer at least monthly rewards or recognition. (Hold on. Don’t roll your eyes yet. About one-third of non-millennials agree.)
All of this might explain why 61% of companies offered spot awards in 2016, up from 43% in 2000.
You can understand why. They’re timely, they boost pay transparency, and they enable employees to actually have influence over their compensation, not just feel like they do.
Does this mean you should ditch your annual rewards in favor of more frequent spot bonuses? No. It does, however, mean that you should take a step back to think about what you want to accomplish with your merit pay program.
In a perfect world, you’d have the ability to dole out hefty bonuses regularly throughout the year to make all your employees’ champagne wishes and caviar dreams come true. But in your world — you know, the one burdened by fiscal restraints (especially during tough years) — you’ve got to be particularly strategic about how and when you give bonuses.
To do that, it’s worth thinking about merit pay and bonuses in terms of rewarding for individual vs. organizational performance.
Individual performance
If your main goal is to improve individual performance, then spot (or even quarterly) bonuses would be most effective. That’s because recognition has the most impact when it quickly follows an achievement, and regular rewards are a great way to acknowledge people in a timely manner.
Otherwise, doling out bonuses just one day out of 365 to recognize individual performance requires both managers and employees to recollect accomplishments that may seem like distant memories. (As much as you advise your people to document their work throughout the year to help foster eventual performance dialogues, we both know that isn’t happening.)
Plus, as more companies kill off the annual review, there continues to be a growing push to strengthen links between compensation, recognition, and performance. The relative immediacy of continuous rewards does this well.
Organizational performance
To reward for the collective accomplishments of your organization, an annual bonus makes sense. But when giving yearly awards, don’t lose sight of the main point of merit pay — to compensate people for performance that surpasses base-pay expectations.
The truth is that many companies award annual bonuses without much regard to performance. As a result, when everyone in the company gets an annual bonus, it’s no longer viewed as an award but an entitlement.
No surprise, then, that only 32% of HR executives said their merit pay program is effective at differentiating pay based on individual performance, and just 20% found it to be effective at driving better individual performance.
Part of the problem is that even poor performers tend to get bonuses. You know whom that upsets most? High performers, who can easily feel robbed and underappreciated.
That’s why it’s important that even when rewarding for companywide performance, you differentiate bonus amounts in meaningful ways. (Translation: A 3% difference in bonus pay between top and bottom performers won’t cut it.)
Mixed approach is best
So which should you choose — annual bonuses for organizational performance or continuous rewards for individual achievements?
The answer is both. Implementing a mixed approach to merit pay helps ensure that you are balancing short- and long-term goals.
Will this be especially difficult when money is tight? Yes, but let’s face it — if you can afford an annual bonus, then you can afford its continuous cousin. The real challenge is not choosing between two options so much as deciding how much to allocate to each.
Besides, paying people in ways that account for performance, recognition, engagement, productivity, and myriad other variables was never easy. And it never will be.
In the end, the best compensation strategy will always be one that includes a wide range of payments, benefits, and perks. Just remember — regardless of what types of incentives you implement, do not sacrifice competitive base salaries. Your people will see right through potential spin around practices geared to keep pay down.