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Ho! Ho! Ho! It’s Year-End Bonus Time Again!

December 2, 2016

As we wind up the gift-giving season and approach year-end, many organizational leaders are cloistered in their offices deciding how to allocate year-end, discretionary bonuses. Considerations for making bonus decisions might include:

  • “This was not Ken’s best year, but he’s worked hard and deserves something.”
  • “Becky has had a great year and deserves a nice bump.”
  • “Ralph did his job, but he’s a real pain to manage. I guess I can’t really leave him out.”
  • “Well, I gave Stephanie $1,500 last year, I should do about the same this year.”
  • “How much in total can I afford to spend?”

What is a discretionary bonus? Are they a good idea or a waste of money? Is there a better way?

If we seek meaning from definitions, Webster defines “discretion” as, “Power of free decision or latitude of choice. An individual choice or judgment.” The word “bonus” is defined as, “Something in addition to what is expected or strictly due.” A discretionary bonus, then, is an unmerited payment of an amount that is based on the granter’s choice and judgment.

Although not explicitly performance based, discretionary bonuses can provide some positive outcomes. However, how they are received depends a great deal on the recipient’s perception. If the amount is substantial, the employee may feel gratitude and a desire (at least momentarily) to express appreciation by putting forth extra effort. He/she may have a greater sense of loyalty and commitment to the leader who granted the bonus. And, he/she will appreciate the recognition that being awarded extra compensation brings.

Conversely, if the bonus is less than in previous years, employees may feel slighted. Absent a connection to specific performance measures, they may feel that for some reason they have fallen out of favor with the boss. They may feel slighted or less valued. If an employee receives no year-end bonus at all, he/she may feel disengaged, resentful, and perhaps a bit angry.  Year-end, discretionary bonuses become expected regardless of personal or even company performance.  If the leader attempts to differentiate bonus awards based on his/her perceptions of performance, someone will inevitably perceive it as favoritism.

With regard to impact on company culture, decisions regarding whether or not a bonus is paid, who will receive a bonus, and the size of the bonus are made by the company leader (or an inner circle of leaders). This positions the leader(s) as the benevolent, paternal, authority, powerful and omnipotent. An employee may feel somewhat power-less to influence his/her pay, as one whose fate lies in the hands of another.  This is not a culture that inspires full engagement.

If discretionary bonuses are not a great idea, what is a better alternative? If a company wants to celebrate the gift-giving season, give gifts. These may be gift cards, items, or even monetary gifts, but make the value uniform and relatively modest.  Don’t attempt to recognize performance. Instead, simply celebrate a year concluded and the fact that the employee is a member of your team. If you want to reward performance, tie the award to accomplishments of specific expectations through a well-designed incentive plan.

When designing a reward system, three objectives we always try to achieve are to make the reward system 1) motivational, 2) cost effective – return on compensation investment, and 3) an expression of the organization’s culture.  It may be part of a company’s tradition to award year-end, discretionary bonuses, but do so with full understanding of the pros and cons.