When we were going through our most recent recession, many businesses were struggling just to keep their doors open, and the “expected” annual pay raise often went out the window.

Some businesses moved to a year-end bonus in lieu of a general hike in base pay because it gave them greater financial flexibility – it didn’t lock them in to an automatically higher wage and salary structure for the following year.

As you well know, economic growth isn’t all that hot right now. We’ve been cruising along in the one-percent-plus per year range for a number of quarters. Some experts see this prolonged slowdown in growth as an indication that we will soon be in a recession. I know that many businesses are reflecting on this and for that reason, the bonus-vs-pay raise question comes into focus again.

Fortunately, inflation has been around one percent recently, so your employees aren’t losing very much buying power from month-to-month or even year-to-year. This relieves some of the pressure to do an across-the-board pay increase to compensate for cost of living expenses.

The question you need to answer is what compensation strategy works best for your business, and this includes how do you instill loyalty as well as encourage productivity.

For example, if you have a long history of yearly pay raises and a core group of employees who have been with your business for a long time, breaking that tradition could be seen as disloyalty on your part. Employees could reasonably be expected to respond with a decreased personal commitment to your business.

However, if you have a younger organization and haven’t yet created the expectation of an almost-automatic yearly raise, you could more easily move to a bonus system.

Advantages of a Bonus System

In addition to giving you some breathing room and security in your payroll, moving to a compensation system that relies more on bonuses has additional advantages.

Even if you currently have a pay raise system based on merit, if you only hand out raises once a year, after a month or two, the impact of these raises has disappeared into the ether. Certainly, by the time you’re six to nine months out, the slightly bigger paychecks have lost their glow.

However, if you start handing out bonuses, the money can make a more profound impression. First, the fact that the bonus check will be for a larger amount is significant. Second, employees can actually do something with the extra money when it is given in a lump sum. For example, it might be enough for an employee to make a down payment on a new car. Then, every time the employee thought about the car, the fact that its purchase was made possible by your bonus would come to mind.

I would also recommend giving yourself the flexibility to award bonuses throughout the year, so you can reward someone for a job well done at the time the job is being done. Generally speaking, I think we humans respond to that kind of behavior-reward system. Place the reward too far away in time from the desired behavior and the reward won’t reinforce the behavior.

Millennials and Recognition

Studies show that Millennials prefer more regular, consistent feedback and encouragement. Maybe the speed at which things happen over the Internet today has ingrained that attitude into the Millennial generation. I know many who post something on their social media accounts and then check every few minutes to see the “likes” start to come in. If they don’t get any “likes” it can be a real downer for them.

Because of this, I think it’s important to communicate, encourage, and reward your young, talented Millennials in “real time.” If you think they’ll be loyal and stick around if you just conduct a once-a-year review with an attached merit increase (like the Baby Boomers did) you’re very wrong. A routine of awarding bonuses when outstanding work is observed could be the ticket to establishing a successful employer-employee relationship with members of the Millennial generation.

Although I’ve been talking about cash bonuses, you also have the option of awarding non-cash bonuses. Gift certificates, travel and other items can be used as alternative rewards. Further, even small items like Starbucks gift certificates can be used to show your appreciation and recognize a job well done.

Weighing your Options

I think I’ve given you several strong arguments that favor bonuses, but, as I mentioned above, you need to weigh the benefits within the context of your organization. If you have older employees who have been with your company for years, a sudden change could damage the good working relationships you’ve worked hard to establish. You might consider a hybrid system: Smaller yearly raises with the extra money going to bonuses. That should keep your team happy and give you more flexibility for years to come.

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