How to Stop Holiday Bonuses from Backfiring

Rather than encouraging employees to keep up the good work, an end-of-year reward can create entitlement and resentment. Six experts offer their alternatives

Written by Advisory Board

Welcome to Advisory Board, a weekly department in which a panel of experts—made up of entrepreneurs and professionals—answer questions you have about how to run your business better.

This week, a reader asks:

“It’s been a bumper year for my business, and I want to reward my small team of employees. I’m considering issuing a holiday bonus, but I’m not sure whether I’ll be able to do so again in the future and I don’t want to set a precedent I can’t maintain. Is there a better way to share the wealth than a one-time handout?”

Here’s what the experts have to say.

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“You won’t set a precedent if your message is perfectly clear. It should go something like this: €˜We’ve had a terrific year and I want to share the spoils of victory with our awesome team that made it happen. Thank you all! I’m going to reward you all this year with a bonus. Please understand that I’d love to do this again next year but it is not automatic. Rather, it’s contingent on driving us to new levels next year that are better than this one. I want everyone to be clear about this. I hope you’re all up for the challenge and I’m interested in great ideas that can make the coming year even better!’
—Michael Koff, owner, Michael Koff & Associates, CPAs, Markham, Ont.

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“Holiday bonuses are a slippery slope to resentment among your staff. We have found they breed entitlement and just end up ratcheting up payroll. Have a party, give your staff some useful but cool swag with only modest company branding on it, or extend the holiday time with €˜company’ days. Keep the cash for when your people show up in the new year looking for a raise.”
Wayne S. Roberts, President and Chief Creative Officer, Blade Creative Branding, Toronto

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“Your challenge is managing expectations. That comes down to good communications. Tell your people you wish to share the fruits of a good year with them. Be clear that this is a one-time bonus, not a change in compensation. If you really want to be sure you remove any long-term expectation, offer the bonus as an experience. Set a value for it and then let people choose how they translate the dollars into an event. It will still be taxed as a cash bonus but, because it isn’t a dollar exchange, it’s clear that this is a one-time gift and not a new normal.”
Shannon Bowen-Smed, president & CEO, BOWEN, Calgary

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“You need to manage their expectations by being open and honest. Let your team know that this may only be a onetime bonus based on an exceptional year, and that you hope to be in a position to issue similar bonuses in the future, but there are no guarantees. The bonus could also provide motivation for future success: €˜If we continue to produce results like these we will certainly continue to share the profits with our employees.'”
John Wilson, founder and CEO, CEO Global Network, Toronto

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In a 2014 survey, Monster.ca learned that employees value time over money—consider offering your employees paid vacation days as a reward. Or you could share your suppliers’ holiday gifts by pulling names from a hat, or host a holiday potluck with a team-building challenge to win one big prize. You can also establish a traditional annual bonus based on your company’s performance. When times are good, bonuses are more generous, and in leaner years, the policy holds. This will help create a sense of ownership with your employees for the company’s overall success. Creating a plan for bonuses is important, and should be part of your business’s overall engagement strategy.”
Sheryl Boswell, director of marketing, Monster Canada, Toronto

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“If the goal is to reward and motivate those that truly performed and helped you achieve the bumper year, position it as a €˜Performance Bonus’ aptly timed around the holiday season. Giving a holiday bonus to all may actually frustrate the high performing on your team, because they see the underperformers benefiting from their hard work. Positioning it as a performance bonus has many benefits. You don’t set a precedent for paying bonuses when performance is less than ideal—they’re only paid when a certain level of success is achieved. You incentivize people to care more about the company—the more profit it earns, the more the performance pool to be distributed. You incentivize employees to perform their own jobs better, knowing that the better they perform, the more of the performance pool they stand to share in. And you avoid creating an attitude of entitlement, which comes from giving rewards that weren’t earned.”
Jeff Quipp, founder & CEO, Search Engine People Inc., Toronto

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Originally appeared on PROFITguide.com