8 Downsides to Employee Bonuses

According to the Bureau of Labor Statistics, July’s unemployment rate dropped to 3.9. Aside from 3.8 in May and 3.9 in the year 2,000, this is the lowest rate in nearly 50 years. In spite of those numbers, pay raises remain abysmally low.

Many companies have chosen the route of bonuses. In fact, Salary.com statistics reported in USA Today that while less than 65% of North American companies gave year-end bonuses in 2016, more than 75% did in 2017.  These bonuses come in a variety of styles, including:

· Spot bonuses – recognition for going above and beyond
· Individual incentive bonuses – a reward for meeting a goal – usually predesignated – also known as a performance-based bonus
· Profit-sharing – when a company shares a piece of overall company growth
· Referral bonuses – pay for referring a prospective candidate who hires on and stays at least the specified time
· Productivity bonuses – designed to inspire, and then award an entire team, department, manufacturing floor, etc.

At first glance, bonuses seem to be a positive, growing trend. After all, who doesn’t appreciate a generous employer who recognizes an employee’s contribution? And, there are several pros that support the bonus concept, such as the potential for:

· Happy employees
· Increased company morale
· Improved company reputation – which attracts talent

But wait, before you do the happy dance, let’s take another look. There is growing research that points to the downside of bonuses.

The Downsides:

1. Employees who are considering a job change may choose to wait until the bonus is received and then turn in his/her resignation. If a company distributes bonuses “across the board” of at least to multiple employees, a company may find themselves facing a mass exodus right after paying out a large sum of cash.
2. When bonuses are paid in groups, but at intermittent intervals, productivity may fluctuate according to the bonus. As Ruth Mayhew, an expert on HR subject matter, points out in a recent article for Bizfluent, “This up-and-down in motivation and productivity can be costly for employers.”
3. The case of unrealistic expectations: Particularly when considering year-end bonuses. Once they are given, employees tend to expect them. If a “flush” year is followed by a decrease in revenue, companies may end up with disappointed, unhappy employees, resulting in a loss of morale.
4. Adverse employee competition: While a little friendly competition can be a great productivity booster, tying bonuses to the game may create a negative culture, building antagonistic peer-to-peer interaction.
5. While dangling the bonus carrot may light the fire under some employees, others feel the pressure and backtrack. According to Gregory Hamel in a post for Chron, this can lead to an imbalance of employee input and hinder overall productivity and efficiency.
6. The reverse effect: Sometimes the promise of a hefty bonus becomes an incentive to cut corners, cheat, and cross ethical boundaries, rather than improve performance.
7. Holding back on salary and benefits in exchange for bonuses can be a turn off for potential talent. Whether an active or passive candidate, top-talent players are usually seeking to increase their salaries. If not, they are searching for flexibility, growth opportunities, etc. The promise of a potential bonus is low on their list.
8. While an employer’s bonus may be fueled by generosity, it can backfire on the employee at tax time. The IRS considers a bonus to be supplemental income and therefore, it’s taxed at a flat rate, which is usually higher than the rate on employee wages.


While a bonus program may have some benefits, including giving a boost to productivity, consider the big picture and weigh both the pros and the cons in the balance before making your final decision. In our next blog, we’ll discuss ways to avoid the negatives as well as positive alternatives.

If you’re looking to hire new employees but don’t know where to start, contact Award Staffing. We will be able to help you find the right employees for your unique business needs. If you’re searching for more tips and trick on how to improve your company’s workforce, check out our hiring solutions blog.



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