HR Leaders May Need to Look for New Retention Incentives After Bonuses Backfire

"Employers think of an annual bonus like a retention bonus, but it's not," said Andrew Greenberg, CEO of Contract Recruiter in Montclair, New Jersey. "Employees think, 'Of course I deserve that money. I earned it over the past year, and I'm entitled to it.' A year-end bonus has nothing to do with going forward."

• Average 2021 bonus pay for exempt employees: 11% of salary.
• Average 2021 bonus pay for nonexempt salaried employees: 6.8% of salary.
• Average 2021 bonus pay for hourly employees: 5.6% of salary.³
  
  

But bonuses still are up. Today's hot competition for talent has employers scrambling to find a way to retain the workers already on staff, and one traditional tool has been to increase bonus payments, whether that's a holiday gift card or a seven-figure sum.  According to Andy Challenger, senior vice president at Challenger, Gray & Christmas in Chicago, IL, "Bonuses go up when the labor market is really tight."

• Firms awarding bonuses based on company profits: 23%.
• Increase over 2021 bonus payments: 12%.⁴
  
• Increase in annual cash bonuses for chief financial officers: 36%/$1.2 million (median).⁵
  
  

Cash isn't king. Amid the Great Resignation, workers are leaving organizations, or choosing new ones, based on several factors other than money. Quality of life is a factor, as are specific types of benefits, corporate culture, and training and advancement opportunities. And a significant number of remote workers say they'll quit rather than return to the office.

• Employees who say work/life balance outranks higher pay: 58%.
• Employees who say they value mental health benefits over a raise: 53%
• Millennial/Gen Z workers who would quit over full-time office requirements: 49%.⁶
  
  

Bonuses can make things worse. If bonuses are handed out without clear guidelines, don't relate to individual performance, appear to be random, are awarded only to management favorites, aren't consistent between comparable employees, or if bonus conditions or formulas suddenly change, workers can be left feeling resentful enough to start sending out resumes.

• 72% of organization base bonus programs on management discretion.
• Only 28% of organizations have formally defined retention bonus criteria.⁷
  
• Women's bonuses average 69 percent lower than bonuses paid to men.⁸
  

 What bonus bucks can't fix. "The primary reason people leave their jobs is that they don't like their boss," Greenberg said. "Understand what risks you have with your employees and be proactive so that you don't have employees who want to leave." 

• Bonuses don't make up for below-market overall compensation.
• Bonuses don't replace concerns about nonmonetary issues.
• Bonuses don't necessarily make workers feel appreciated.

Bonus plans that pay off. Performance-based bonuses with clear guidelines that allow workers to raise their earnings can work in a management by objective context if the overall compensation is competitive with similar organizations. Public recognition and personalized rewards—beyond a coffee cup with a company logo—can make workers feel appreciated and valued. Other options include spot bonuses, paid time off, donations to a staffer's favorite charity, and team performance rewards such as sabbaticals for meeting goals.

• 65% of employees prefer bonuses based on personal performance.⁹
  
• 79% of people leave jobs because they feel unappreciated at work.¹⁰
  
• 59% of employees say they'd be more likely to stay if they received meaningful holiday gifts from their employer.¹¹
  

Options are an option. Stock options are an alternative to annual bonuses when it comes to employee retention. Although options have fallen out of favor since the tech boom, the long-term nature of options gives workers an incentive to stick around, because most options don't vest until many months, or even years, in the future. There are more than 6,400 employee stock ownership programs in place as of 2019, holding assets worth more than $1.6 trillion. To work as a retention tool, option programs should be structured over the long term, rather than as discrete, one-time grants. Otherwise, as with bonuses, workers are likely to wait until their options vest and then quit.

• Assets in employee stock option plans: $1.6 trillion (2019).¹²
  

• Increase in monthly quits rate immediately after options vest: 0.5 percentage points.13
  

 

If you must. In many cases, the money budgeted for bonuses is better spent on increasing salaries, improving working conditions and increasing employee satisfaction. If your organization does have a bonus program, understand that it's inevitable some employees will time their resignation right after bonuses checks go out. "People are just going to keep waiting you out. It's basic human nature," said Greenberg. "All you really can do is to do your best to make sure people want to work for you."

¹Source: Bureau of Labor Statistics, 2022

²Source: The Great Resignation: An Analysis of the Employee Experience, 2021

³Source: Zippia.com, 2022

⁴Source: Challenger Gray & Christmas Inc., 2022

⁵Source: "Bigger Bonuses Lift CFO Pay as Companies Rebound From Pandemic Shock," The Wall Street Journal, 2022

⁶Source: "Nearly 40% of workers would consider quitting if their bosses made them return to the office full time, a new survey shows," Business Insider, 2022

⁷Source: "Amid Tight Labor Market, Organizations Are Increasingly Relying on Bonuses" Workspan Daily, 2021

⁸Source: "Digging Into the "Why" of the Gender Pay Gap," ADP, 2019

⁹Source: "Will They Stay or Will They Go," Payscale, 2019

¹⁰Source: "Performance Accelerated," OC Tanner Learning Group, 2019

¹¹Source: Employer Gifting Survey, Snappy.com, 2021

¹²Source: National Center for Employee Ownership, 2021

¹³Source: "Retention Effects of Employee Stock Options: Evidence from Bunching at Vesting Date" Qing Gong, Ph.D., University of Pennsylvania, 2027