What You Need to know About Year-End Bonuses

The holiday season is a great time to show employees your appreciation for their hard work throughout the previous year—hence the existence of a year-end bonus. These are meant to be comparatively large bonuses that convey the value and gratitude of a company to its employees.

But for many business leaders, year-end bonuses are more trouble than their worth. The stress of trying to decide on an amount, keep everyone happy, and balance end-of-year budgets is just too much to worry about.

In this blog, we want to go over what you need to know about giving year-end bonuses so that you can feel confident in giving employees something that they actually want, all while avoiding stress yourself.

Why Year-End Bonuses Are Important Today

The Great Resignation is old news, we know, but its aftershocks are still shaking the corporate landscape. Voluntary turnover is still high, and employee expectations are evolving—they want to work for a company that values, supports, and cares about them as people.

In other words, employees now want and expect more than ever from their employers. And a year-end bonus can be a great way to reward them and convey value if done correctly.

Benefits of Good Bonuses

Bonuses are a form of employee appreciation, and showing employees gratitude has a bunch of amazing benefits:

• Raise engagement by 40%
• Lower turnover by 31%
• Increase loyalty by 3X
• Increase productivity by 14%

Recognizing employees’ contributions and showing that you value their efforts can transform your business and culture. And bonuses can play an important role in that.

Pitfalls to Avoid With Year-End Bonuses

A lackadaisical or one-size-fits-all bonus will often do more harm than good. Here are some of the pitfalls to avoid when planning your end-of-year bonus:

• Giving everyone the same amount, regardless of position or productivity. Giving a disengaged or disgruntled employee a bonus might help them be more engaged—but if it’s the same as a high performer gets, those stellar employees may get disgruntled themselves.
• Relying on a single holiday bonus to express your appreciation. One bonus a year isn’t good enough. Imagine only expressing your appreciation to your spouse once per year—that may lead to some tension. Year-end bonuses need to be added to a strategy of frequent recognition.
• Promising one thing and then giving another. Did you promise a large bonus only to realize you can’t give it out for one reason or another? That’s a fast way to disengage your workforce.

Bonus Vs. Raise

Do a quick online search and you’ll see plenty of sites telling you to offer raises instead of bonuses. And yes, raises provide better long-term benefits for employees, such as a consistent bump in pay opportunities for career advancement. You should definitely reward your top performers with such a benefit.

However, bonuses should be used for a completely different purpose. Bonuses are one-time rewards used to drive effort and show appreciation. So while you should never use a bonus to replace a raise when a pay increase is deserved, bonuses in and of themselves can be a positive thing.

Different Types of Bonuses

There are multiple different types of year-end bonuses you can offer, and each has its own pros and cons. Here are some of the most popular ones:

• Performance-based. These bonuses offer employees different amounts based on their success and the work they accomplish. This is a great model for employees whose work is easily measured and compared.
• Flat-rate. These bonuses offer everyone a single bonus amount, regardless of any outside factors. These can be a good way to show wide-spread appreciation for your team.
• Longevity-based. These bonuses offer amounts based on the tenure of employees. These can be a good way to drive retention because it shows that the company rewards loyalty.

We recommend a blend of all three of these. For example, offer every employee a base bonus based on their tenure, and then allow each of them to earn extra by setting goals and rewarding performance.

How Much Should Your Year-End Bonus Be?

Every business and industry is different, so this question is hard to answer. However, the average for most employees is to get 1-5% of their salary for an annual bonus.

Of course, this depends on your budget and any other rewards you offer employees throughout the year. If you have birthday, holiday, service anniversary, and other retention reward programs, you probably don’t need to also give a huge year-end bonus.

Best Practices for Giving Year-End Bonuses

So you’ve decided to offer end-of-year bonuses for your employees, and you want to ensure everyone feels fairly rewarded without breaking your budget. Here are some strategies to keep in mind:

1. Offer variable amounts based on performance. 

To avoid employees feeling shortchanged, give some wiggle room based on how much each employee contributes. Base bonus amounts on certain outcomes and clearly communicate how each employee can contribute to those outcomes in order to earn a bigger bonus.

This is the best way to ensure everyone is satisfied. Low-performing or disgruntled employees shouldn’t be automatically rewarded with a big amount, and high-performing employees should be rewarded for their efforts.

2. Be clear in your communication.

Popping a bonus on your employees without any warning may seem like a good idea—and chances are, most employees will be pleasantly surprised. At least at first. But soon people will start talking about it, comparing it to others, and wondering why they didn’t get more. 

In order to avoid that, clearly communicate your bonus intentions, especially any performance-based metrics you’ll look at when deciding who gets how much.

3. Consider your employees’ tenure.

Should an employee of 10 years get the same bonus as someone who started a few months ago? The short answer is no. If longer-tenured employees never get a little extra something to show them appreciation, they’re not going to stay. There won’t be any incentive for sticking around.

However, if you offer awesome service awards that really reward employees for their loyalty and time, then a consistent end-of-year bonus can work. For example, Awardco uses Lifestyle Spending Accounts to give out monthly stipends to each employee—and the amount increases each year an employee stays. This rewards loyalty, so bonuses don’t have to.

4. Make it special in one way or another.

A year-end bonus of $50 is going to backfire. But a small bonus in addition to year-long recognitions and celebrations can go over well. Also, if a smaller bonus is given in addition to a holiday party/gift and food can be the icing on top of the cake. 

5. Keep any tax implications in mind.

Bonuses count as supplemental wages, which are subject to taxes. These can be filed in two ways: combined with regular wages and filed normally OR paid separately from regular wages and withheld at a flat rate.

6. Give them out early enough to matter.

People will enjoy an end-of-year bonus more if they get it before or during the holidays. These bonuses can help families afford presents or just help employees feel more appreciated when they’re a part of the festivities.

If your workforce is global and celebrates different holidays, such as the Lunar New Year, take that into account when planning bonuses.

Alternatives to Cash Bonuses

It’s no secret that some companies may not have the budget for an end-of-year bonus, but that doesn’t mean you can’t offer something to show your appreciation. Here are some alternatives that can still help employees feel valued:

• Extra PTO. No one would say no to an extra few days of PTO, especially around the holidays. Give people time away from the office and let them recharge after a year of hard work.
• Catered meals. Cater lunch for an entire week at the end of the year to show how much you appreciate your employees. This takes stress off employees’ shoulders and shows that you care about them, even if you can’t afford a big bonus.
• Personalized gifts. Meaningful, personalized gifts can make an employee’s day. Don’t settle for a branded t-shirt, though! These gifts should fit each employee and be something they’ll actually value.
• Team trips. Take employees (and their spouses) on a vacation somewhere. Giving them a once-in-a-lifetime experience will show them that you care.
• Home services. Give employees a service such as someone to go and clean their home. Something that simple can seem minor to you but can transform how an employee feels.
• Memberships or subscriptions. Find out what employees would like to participate in or learn, and then give them a year’s membership/subscription to that thing. Whether it’s the gym, MasterClass, an art course, etc., this shows that you care about employees outside of work.

One of the best things you can do is to ask your employees what they want. Be transparent about the company’s inability to offer bonuses, and then offer a few alternatives and let employees choose. This shows that you value their opinions.

Year-End Efforts to Ensure Year-Start Success

January is the month with the highest voluntary turnover, and that’s often because employees don’t feel valued after a year of hard work. But with a bonus that fits each employee’s efforts and rewards them fairly, your people will be less likely to leave.

The goal of a bonus is to show employees how much you care about and appreciate them, and to incentivize them to stay—we hope this post has helped you know how to craft a bonus that accomplishes those goals.