Each year, many employees across the country receive annual cost-of-living raises and performance-based bonuses. It’s a classic compensation strategy and one of the main ways companies look to improve work performance.
Of course, pay matters to employees—but maybe not as much as you think. The best predictors of employee retention are actually factors unrelated to pay, like overall job satisfaction. Moreover, employee engagement can impact productivity by as much as 18%.
If you’re spending more money on salary increases each year but employee performance isn’t improving, what else can you do to engage and motivate employees? Here’s why salary raises and bonuses alone don’t always work and what you can do to support a thriving, productive workforce.
Why Salary Raises Lose Their Impact Over Time
Salary increases permanent payroll expenses yet don’t guarantee performance improvements. Due to a variety of psychological drivers, raises can lose their motivational power over time, influenced by factors like:
- The adaptation effect: Hedonic adaptation is the idea that people quickly become accustomed to new experiences or improvements, including salary increases. A 5% salary increase feels meaningful initially, but within months, it becomes the new baseline—quite possibly without any sustained improvement in work output.
- The entitlement trap: When raises become routine, they can lose their meaning. Employees begin to expect them, which decreases their feelings of gratitude and motivation. This can lead to a sense of entitlement, where employees feel they deserve raises regardless of their efforts and output.
- The risk of salary complacency: Employees are more likely to feel disengaged when salary increases are given without sufficient connection to performance. Such raises can simply feel like the norm rather than a result of achievement. This can lead to employees becoming complacent—both in their attitudes toward salary and in their drive to push for continuous improvement.
Moreover, salary increases aren’t as protective against employee turnover as true employee engagement. An engaged employee would need a pay increase of around 31% to consider taking a job with another company. It takes a lot of money for them to give up the meaningful work and connections they already have!
A narrow focus on salary as a retention or engagement tactic doesn’t deliver results like a well-rounded compensation strategy supported by a robust recognition program. Pay matters most when it complements the overall employee experience.
Why Bonuses Are an Expensive, Short-Term Fix
Companies can spend millions of dollars on bonuses yearly, typically ranging from 1% to 15% of an employee’s salary. That’s an expensive line item for any organization. Costs aside, are bonuses really the best strategy for rewarding employees?
While bonuses can provide a temporary boost in motivation, they also come with drawbacks if used as the only tool for employee engagement:
- Delayed recognition: Behavioral psychology suggests that immediate reinforcement is more effective for shaping behavior than delayed rewards. However, bonuses are typically given on a delayed schedule at the end of a year or other milestone.
Large one-time bonuses don’t provide an immediate connection between performance and the reward. Recognizing employees’ efforts in real time is more likely to motivate them to sustain those efforts.
- Lack of consistency: When rewards are few and far between—rather than dispersed consistently—employees don’t benefit from the regular feedback loop of action and reward. With something like an annual bonus, motivation can dip significantly in the stretch of time between rewards.
- “Set-it-and-forget-it” nature: Bonus structures can create a set-it-and-forget-it mindset, where employees may expect the reward regardless of performance. Like annual salary raises, this can lead to complacency and a lack of drive to push for improvement.
You might think, “Everyone loves money, right?” But the structure and infrequent nature of bonuses can lead them to have a lower ROI than other recognition efforts. When rewards are tailored to an employee’s performance and preferences, they have a bigger impact.
How to Improve Work Performance with Recognition-Driven Rewards
Harness the power of personalization by meaningfully connecting rewards with employee contributions. As part of a comprehensive strategy for employee engagement, tap into the impact of:
- Frequent, small rewards: Rather than relying on big-ticket items to compensate employees, recognize them more often with small rewards. These outperform both salary increases and end-of-year bonuses when it comes to employee motivation.
- Performance-based incentives: Directly connect rewards to employee performance goals for high-impact outcomes. Commissions, project bonuses, and evaluation-based rewards have more meaning for employees and encourage them to put their best foot forward.
- Peer-to-peer recognition: Recognition from a variety of sources creates a network of support for employees. Peer recognition is one way to facilitate this, often without adding significantly to your budget. This type of recognition also strengthens relationships and teams, further improving employee engagement.
- Management recognition: When asked where their most memorable recognition came from, the majority of employees identified someone above them in the org chart—with 28% naming their own manager. Clearly recognize your employees’ contributions as you see them, offering praise or rewards in the most meaningful forum for each person.
- Alternative bonus types: Bonuses don’t have to come as delayed rewards at the end of the year. Consider other bonus structures, like tenure milestones or on-the-spot bonuses for significant achievements. The unexpected or timely nature of alternative bonus types sidesteps some of the pitfalls of regular bonus structures.
- Non-compensation perks: What other value can you offer employees that isn’t a salary or bonus line item on your budget? Consider flexible work schedules, remote work environments, or a recognition platform to motivate and engage employees.
When you regularly recognize the impact of an employee’s contributions, they’ll feel more empowered to do their best work. Retaining high performers with low-cost recognition efforts supports a strong company culture and protects your bottom line.
Encourage Improved Work Performance with Awardco
No matter your overall compensation strategy, providing recognition with Awardco amplifies your spending power. Even with a small budget, you can put together a tailored rewards system with high ROI that motivates employees and boosts performance.
Recognize your employees with meaningful rewards using the Awardco platform.
An avid lover of fantasy books, a proud Hufflepuff, and a strong proponent of escapism, Jeff has a love of good storytelling. He relies on that for both his professional work and his writing hobby (don’t ask about the 10+ novel ideas collecting virtual dust on his computer).
