Not to sound too much like the Grinch, but the effectiveness of the holiday bonus is questionable. Companies need to recognize that there are more creative vehicles that can serve as incentives to drive growth and recruit and retain key talent.
That check doled out at the end of December has a short-lived impact on results. Studies indicate that the effect of the bonus on employee motivation is typically two weeks before—and a week after—the reward is received. When paying a bonus, the desired focus should be 52 weeks, not three. When it comes to retention, this short-lived and anticipated incentive, once received, will do little to stop employees from moving on.
For rewards to be effective they have to create increased focus. This focus is a direct result not only of financial reward but also of a positive work environment and the path that the company has drawn for the personal and professional development of key employees. Money is unquestionably motivating, but so is an atmosphere where a culture of confidence exists.
The yearly “reward” that is a holiday bonus is often considered part of salary, essentially diminishing the true definition of pay for performance and ultimately engendering a sense of entitlement. And while the intention might be noble and driven by the emotions of the holiday, this type of across-the-board reward can alienate employees whose performance outpaces others.
Growth-Focused Incentive Plans
A better way is to create a business environment that fosters achievement and implements a long-term growth focus through incentive programs tied to results. A strategy that identifies key compensation philosophies and priorities at the heart of an effective incentive plan should:
• Establish the framework of an employee and executive compensation philosophy.
• Identify factors that will impact desired performance.
• Create a plan of action for strategy development.
As a result, the rewards program brings together the growth and wealth-building needs of the company and the employees. Far too often a disconnect exists between the two.
As part of the discovery process, data are gathered to address top executives' vision for the future, especially growth expectations and the factors that will impact these expectations. In addition, key staff members should be asked to specify their individual objectives in relation to the company’s performance and expected growth. This process helps to ensure that the company’s compensation philosophy and design are built on a proper and lasting foundation.
Compensation can have many meanings—payment, reward, advantage and opportunity. When it comes to retaining key talent that can help a company achieve growth and prosperity, all these definitions must come into play.
Companies often don’t realize their full growth potential because they have yet to develop an incentive program that truly motivates employees. While “motivation” in the business world is often a euphemism for “more money,” most executives would likely agree that it takes more than a hefty paycheck to keep them satisfied.
Savvy company leaders recognize that employees are motivated by similar elements—an atmosphere that encourages development, participation in the decision-making processes, opportunities for professional growth and a comfortable living now and the ability to build wealth for future needs such as retirement.
Management should be specific as to the importance of top performers' individual contributions and how they benefit and reflect positively on the company. It should then take into account the best way to motivate those individuals through a personalized package tailored to a key employee’s situation and goals. For example:
• Deferred compensation plans are the bonus that keeps on giving year-round because they allow employees to reduce their current income tax liability and watch their funds grow tax-deferred, without being subject to the pretax contribution limits of a 401(k) plan.
• Phantom stock is another incentive that can be tied exclusively to performance. Consider phantom stock as a promise to pay a bonus in the form of the equivalent value of company shares or the increase in the value of the company over a period of time.
• Company stock options are another form of incentive compensation appealing to many. The amount of equity can be tied to years of service, translating into potentially high returns for employee longevity.
To be empowered and excited about their work, their role with the company and ultimately the company itself, key employees must feel part of the entire process. They must be encouraged to embrace an ownership mentality. They need to know where the company is headed, the strategies to get there, how they can participate in achieving company goals, how to track their results and what’s in it for them.
The fundamental focus of an incentive plan becomes blurred when the full potential value of the total rewards package is not communicated regularly and powerfully. Corporate leadership needs to focus results in a laser-like fashion, and the elements of the incentive plan need to be built to generate line of sight.
Failure can lurk with the absence of clear standards and methods to set and reset values that are consistent with employee expectations. Without them, key talent might leave if offered a better value proposition elsewhere.
Holiday bonuses can promote short-term allegiance, but they should be used as a motivational tool, inspiring key employees to maintain an active and long-term role in the organization’s growth. The holidays come once a year, but with the right mix of incentives in place the celebration should last year-round.
Jim Moniz is CEO of Northeast VisionLink and Northeast Wealth Management in Braintree, Mass.
Equity Incentive? How Perceptions of Employee Stock Options Affect Job Performance, SHRM Online Compensation Discipline, April 2011
Phantom Stock—It's Alive!, SHRM Online Compensation Discipline, August 2010
Deferred Compensation Plans Can Aid Cash Flow, Retention, SHRM Online Compensation Discipline, November 2007
Employee Engagement and Commitment, SHRM Foundation, October 2006
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SHRM Metro Economic Outlook reports