Base Salary vs. Bonus: What's Better for Employees?
As more and more large corporations hop onto the idea of doling out bonuses instead of raises for their staff, it’s easy for employers at any scale to get on board. Bonuses are variable, not fixed costs, and it gives employers a degree of flexibility when decided how (and how much) to reward employees for a good year.
However, many employee advocate groups warn against this compensation structure. Why? The uncertainty. The theory of a bonus at the end of the year means a lot less to employees than the expectation of a x% raise.
What will be best for your employees should be the #1 factor you consider when deciding how to structure your compensation for next year. You’ll probably see push back from employees and new hires on a bonus-based plan unless you:
Work mostly with contractors who don’t already expect year-over-year raises
Use flexible office practices like ROWE
Are experiencing significant growth and want to reward the team for hitting goals
Plan to use raises in the future as a talent-strategy.
The Argument for Bonuses from the Employee Perspective
Many companies already incorporate incentives like bonuses and stock options into their compensation plans when they are doing well. It might seem counterproductive from an employee’s perspective to accept bonuses in lieu of raises if they are already used to receiving periodic bonuses.
However, there are definitely some situations where an employee would consider a bonus-based compensation structure an asset:
It acknowledges personal and team success: Using the promise of a bonus when individuals and team meet certain metrics can be a great way to fuel your company’s growth. When bonuses are based on the work employees do above and beyond the call of duty, they can far exceed the percentage increase consistent with raises. If a person or team is consistently hitting and exceeding goals, their bonuses might outweigh the incentives of a raise.
It’s usually reserved for executives: For many mid-sized companies, end-of-the-year bonuses are already a common incentive for the executive team. Spreading the love to the team as a whole might be considered a gesture of goodwill and motivate your employees to work even harder next year.
It’s great for salary negotiation: If an employee consistently receives incentive-based bonuses, they can easily use it as evidence in their next salary negotiation (with your team or at other companies).
The Argument Against Bonuses from the Employee Perspective
Most companies in the US are seeing push back from employees about the elimination of raises, and for good reason. Like we said above, unless your staff is motivated by company growth, choosing bonuses can seem risky and counterproductive. In some extreme cases, to can cause employee churn and keep qualified candidates from applying to your open positions.
Understanding the arguments against bonus-based compensation will help you understand if your team is ready for a change:
Bonuses are not guaranteed: Unlike raises, which are often negotiated during the hiring process, bonuses are a potential reward for individual or company success. The variability involved in what and when a bonus will be received can be a real turnoff for employees.
Bonuses do not necessarily account for seniority: Both when an employee is being compared to peers for a promotion within a company or for job opportunities at other firm, base salary is normally the figure that recruiters and hiring managers use. Therefore, even a top, senior salesman can be overlooked because his base pay is consistent with less deserving coworkers.
Bonuses do not carry over to other benefits: This argument is related mostly to disability and maternity pay. If insurance and other payments cover a portion of an employee’s salary, the portion they take home via bonuses is not factored into their benefits, which can severely hurt quality of life when an employee is on leave.
A Note on the Employer Perspective.
An all-bonus compensation plan, while enticing for many small and medium-sized businesses, is only the right call if you have the culture to support it. If you’re unsure if your company will support a bonus-based structure, read more about the employer perspective here.