Base Salary vs. Bonus: What's better for Employers?

Base Salary vs. Bonus: What's better for Employers?

This year, an increasing number of large corporations have announced that they will be offering bonuses in lieu of raises for their employees. The Washington Post reported that these bonuses range in magnitude (and implications) from $150-3,000, but one thing remains across the board: they are a one-time payment.

There are a couple of intriguing reasons why you might want to consider opting for bonuses instead of raises for your staff this year. For one, they don’t increase your fixed-costs over time. You’re able to use the excess money that you’ve accrued over the year to reward employees and spread goodwill. Further, many companies that are opting for the bonuses are taking advantage of changes in the tax law (and you can read more about them here).

But what’s better for the average small-to-mid-sized company in America- bonuses or raises? It comes down to two major considerations: What’s your status-quo and what type of bonus could you afford?

What’s Your Status-Quo?

There are definitely a few employees out there who legitimately do a good job at work every day for the passion, the love, the personal betterment… but the chances that your staff is made up of these people are slim. Your employees are probably motivated by what they know best- money and security. If your team in entrenched in a compensation plan that works- don’t feel any pressure to change it.

That said, if you already have a system in place with mixed compensation- a combination of periodic raises and bonuses, it might be worth considering if you should move to an all-bonus structure.

What Type of Bonus Can You Afford?

Since bonuses are a variable cost, they are relatively easier for an employer to plan for over the course of the year. However, their variability can be considered negatively by staff that can’t plan for a specific up-tick in wages.

Be very clear with employees about what type of bonus they can expect. Many companies offer 3-5% bonuses for clerical and support staff, 10-15% bonuses for managers, and bonuses dependent on results for executives. These numbers are consistent with what employees could expect out of a raise, and can quell any fears they may have about preparing for the future.

You could also consider assigning bonuses as rewards for teams and individuals instead of assigning a structured compensation plan. For example, the entire team receives a 10% bonus if the sales team makes it to a goal for the year. These bonuses are definitely more volatile from an employee’s perspective, and, if mismanaged, can negatively impact your employer brand.

Bonuses-as-rewards are best used in times of significant growth. If you’re planning to scale up your operations, assigning metrics for your teams to hit for their bonuses can be a great way to share the responsibility of making sure that you are expanding successfully.

So Which Is Better?

There is no concrete answer for which compensation style is better for your company. For larger corporations that just received a huge tax break, bonuses are a great way to continue to save money while rewarding employees. But for smaller, less established companies, the decision to offer raises or bonuses will rely heavily on your company culture.

Consider Raises If Your Team Is:

  • Made up of individual contributors

  • Already used to an established compensation plan

  • Consistently hitting revenue numbers, but not experiencing any exponential growth

  • Motivated by personal KPIs and metrics

Consider Bonuses If Your Team Is:

  • Experiencing a high volume of growth

  • Made up of employees that already make majority commission

  • Motivated by company growth

A Note on the Employee 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. The uncertainty can be scary, and might keep good employees from applying to or staying with your company. Read more about the employee perspective next week.

Base Salary vs. Bonus: What's Better for Employees?

Base Salary vs. Bonus: What's Better for Employees?

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