Advantages & Disadvantages of Bonus Payments

laflor/E+/GettyImages

Every well-meaning employer wants to express goodwill to employees whom they believe contribute to the company's success. Therefore, usually near year-end when many organizations are calculating their annual earnings, employers provide bonuses that can range from a gift card for a holiday centerpiece to a bonus check for thousands of dollars. There are pluses and minuses to awarding employee bonuses, and even bonuses with the best intentions can have unintended consequences.

The Age of the Benevolent Employer?

Many employers who anticipated a windfall as a result of the Tax Cuts and Jobs Act passed by Congress in 2017 were generous to their employees by providing cash bonuses – AT&T provided $1,000 bonuses to nearly 200,000 of its employees. On its face, this might look like the Benevolent Employer Age, but there are advantages and disadvantages to employee bonuses. While many employers whose decisions about bonuses were affected by the Act, many more charted their own path – windfall or not – handling business as usual by rewarding their employees with cash bonuses.

What are the Types of Bonuses?

Private-sector employers aren’t the only ones who reward employees with year-end bonuses or performance bonuses. According to The Washington Post, at one point in the early 2000s, two-thirds of federal employees got bonuses ranging from $100 to as much as $25,000. However, during the mid-2000s, a freeze made federal worker bonuses nonexistent. Employee bonuses reward high-performers or are a company gesture intended to simply share the wealth with the company's workforce. Bonus payments might be based on performance such as rewards for high-performing employees whose annual reviews reveal exceptional job performance. Departments or teams in the manufacturing industry might receive bonuses that are tied to workers exceeding productivity goals. And publicly held companies sometimes reward employees when the stock values rise.

What are the Advantages of Employee Bonuses?

Naturally, one of the biggest advantages of employee bonus payments is employee appreciation. What's not to like about getting a generous check at the end of the year to help with holidays, fund a well-deserved vacation or just pay off some bills? Employees who receive bonuses year-after-year might come to expect some type of bonus, and whether that amount changes based on company profit, employee morale is bound to improve at least during the final months of the year. Another advantage is from the employer's perspective: aside from the feeling that you've made a tangible contribution to your employee by rewarding them for their commitment throughout the year, the improved employee morale may translate to a stronger reputation in the job-seeker community. Even if you don't pay the most competitive wages, you can still attract qualified applicants who are looking to work for a company that values its employees.

What are the Disadvantages of Employee Bonuses?

One of the obvious disadvantages for employers is that the timing might result in a mass exodus – or, at least a spike in the turnover rate – following disbursement of year-end bonus checks. Employees who are not satisfied with their jobs and considering making a change may wait to turn in their resignation until after they've received their year-end bonus. For employees who are looking to increase their compensation, some might prefer that a year-end bonus comes in the form of a wage or salary increase so that their earnings are compounded. For example, an employee earning $50,000 who receives a 10-percent bonus, might prefer to receive a 10-percent increase that raises her salary to $55,000. After such an increase, future increases would be based on the $55,000 annual salary rather than $50,000.

Another disadvantage is rewarding employees with performance-based bonuses for shorter, finite periods. An example is bonuses that are paid on quarterly performance or production. This type of bonus might motivate employees for that period, creating a productivity surge. After incentive period ends, the production surge might drop during periods when employees aren't eligible for bonuses. This up-and-down in motivation and productivity can be costly for employers.

References

About the Author

Ruth Mayhew has been writing since the mid-1980s, and she has been an HR subject matter expert since 1995. Her work appears in "The Multi-Generational Workforce in the Health Care Industry," and she has been cited in numerous publications, including journals and textbooks that focus on human resources management practices. She holds a Master of Arts in sociology from the University of Missouri-Kansas City. Ruth resides in North Carolina and works from her office in the nation's capital, Washington, D.C.