What gets a company farther- year-end bonus or unexpected rewards?
Over a decade ago, I had two compensation experiences that have stuck with me throughout my career. In the first one, I received a substantial year-end bonus, but it was $500 less than the projected amount. The reason given was that by giving me less that would somehow incentivize me to perform better the following year. It had the opposite effect. About a year later, I received a year-end bonus that coincidentally was $500 higher than the projected amount. The reason for the extra bonus was the firm recognized the amount of time I spent on recruiting, and while $500 was a small amount relatively speaking, the firm wanted to show their appreciation.
These decisions had profound impacts on me.
Many companies provide year-end bonuses, either as a set amount or a variable amount, as positive incentives for employee performance. My last blog post analyzed the merits of formula-based incentive plans. There are a number of disadvantages to the single bonus approach. First, since it is timed at year end, employees may do acts of greatness early in the year and are left hoping management will remember and take those acts into account at year end. Second, bonuses paid in December by their nature lose the temporal connection between great performance and recognition. Third, even variable year-end bonus plans eventually become expected no matter how much a company communicates that they are discretionary.
So how does a company overcome these hurdles, avoid developing an entitlement attitude, and promote great employee performance?
We’ve found that providing recognition shortly after an employee performs well and tying it to the performance has substantially higher impact on morale than year-end cash bonuses. The more emotional the recognition and less cash-oriented it is generally the greater the impact on the employee. Examples range from the standard recognitions like gift cards, handwritten thank you notes, company-wide email recognition, and additional time off to more creative and personalized rewards like an afternoon off to go on a shopping spree at a favorite retailer, a night on the town complete with a private driver, paying for a much needed repair expense for an employee, and paying for employee dinner parties.
Our limited anecdotal evidence supports this principle. When we asked an employee what had more impact on her ... the last $500 quarterly bonus (expected) versus a surprise gift card valued at $250 and an afternoon off to spend it, the feedback was resoundingly the gift card.
Based on my personal experience over a decade ago, unexpected positive rewards have great impact. Managers should consider using them as part of their overall performance reward resources.
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