Advantages & Disadvantages of Bonus Payments

by Neil Kokemuller; Updated September 26, 2017

Bonus payments are special cash rewards given to individual employees, work teams or business units that achieve particular milestones. In some cases, employers give bonuses as a goodwill gesture, often around holidays. Bonus payments can motivate employees, boost morale and improve retention; however, unstructured or poorly structured payments can lack value for the organization.

Bonus Payment Advantages

A primary purpose of any form of compensation is employee motivation. With performance-based bonus payments, such as year-end payouts for reaching a target sales volume, the goal is to motivate workers to put in extra time or effort to succeed.

Directly tied to employee motivation is the benefit of improved production. Bonus payments can incentivize a number of objectives, such as higher sales or manufacturing production or excellent attendance.

Non-performance-related extra payments, such as holiday bonuses, may generally contribute to improved morale and retention. At the time of payout, the employer's goal is to express gratitude for worker production. When effective, such payments lead to temporary positive feelings about the business for employees. Ideally, this temporary feeling helps generate long-term loyalty to the organization because the bonuses are just one positive measure to create a happy workplace.

Bonus Payment Drawbacks

A general concern about bonus payments is that they should connect to an intended purpose, according to Forbes. If employees are confused or uncertain as to why they receive a payment, it doesn't have much value for the employer. Two specific drawbacks can result from this basic problem:

When your bonus payments don't contribute to higher morale or improved productivity, they are nothing more than an extra expense for the business.

The other major risk of unscripted bonuses is resentment from inconsistent implementation. If you dole out generous Christmas bonuses one year and then give your workers a gift certificate for an inexpensive dinner the next year, employees may naturally feel disappointed. Also, if you give bonuses inconsistently to employees and departments, you risk internal bitterness and a sense of unfairness, which is bad for workplace morale.


  • Depending on whether your bonus payments are promised or spontaneous, there may be a tax obligation on payments and you may have to deduct employee taxes, according to Business and Legal Resources.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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